I get mad in March.
It’s not because I stink at my basketball picks, or that the weather can’t decide if its still winter or spring.
I get mad in March because it’s when the CPAs’ adjusting journal entries come rolling in, and often blow up any kind of analysis one could do on the financials.
I call it the whiplash effect– you’re chugging along throughout the year thinking you are doing ok, and then all of a sudden–BAM– you have a huge loss in December because your CPA is booking the whole year’s tax deductions into your books on December 31st.
It’s not the CPAs fault– they are doing their job. It’s the owner’s fault– they aren’t looking at their books. If they were (like we do) after the first time it happened, they’d be demanding estimates of those entries and booking them all year long to normalize earnings and get a true picture of what is happening in the business.
This whiplash effect can be extremely damaging if you think you are doing “ok” and then you find out you aren’t.
Here are some common adjusting journal entries we see made by CPAs on December 31:
Depreciation expense: Depreciation tends to get calculated and the entire year’s write-offs get booked in December. We ask our client’s CPAs to give us an estimate at the beginning of the year– most have schedules they share with us. At the end of the year, the depreciation is just a minor adjustment to book the actual. The same goes for any large purchases you make– ask your CPA for the depreciation schedule so you can start booking it right away.
Payroll adjustments: A common mistake that we see is businesses recording “net” payroll– that is, payroll is expensed by looking at the cash that comes out of the bank. What you will often see are CPAs calculating the Gross Payroll expenses and putting that expense back on the books. This can distort your financials significantly– so we suggest that you ask them to give you a payroll journal entry that you can use to enter payroll properly each pay period. Oh, and make sure you tie your payroll numbers out to the payroll reports at least quarterly! You’ll be surprised how many issues you may find.
Revenue recognition: If you file your taxes on an accrual basis, your CPA may need to either pull back or defer revenue from year to year. What they are doing is basically recording the amount of revenue you “earned” during the year against what you billed. This is especially true for long projects where you may bill up front and recognize the revenue but you haven’t really done the work yet to “earn” the revenue. If you aren’t doing this calculation yourself throughout the year, you might be falsely thinking you are doing ok when in fact you may be operating at a loss.
These are some of the most common adjusting entries that can cause the whiplash effect, and give owners a false sense that things are going well– or not so well. So work with your CPA after they get their head above water on April 15th, and ask them for estimates of their adjusting entries, or how you can avoid the whiplash effect by booking things properly throughout the year.