"My Accountant Fixes That at Year End"
Ridgeline Handyman LLC has been in business 14 months. You take over the books in July and find QuickBooks Online records showing a net loss of $11,300 for the year to date. Three problems stand out. (1) The owner's $3,500 monthly transfer to his personal checking account was recorded as Contract Labor for each of the last five months. (2) A $2,900 payment on the business credit card was categorized to Office Expense instead of to the card liability. (3) On the card statement, $1,240 at a home-improvement store was for the owner's kitchen renovation and $600 in fuel was for his personal truck; both sit in business expense accounts. The owner says, "Just leave it - my accountant fixes that stuff at year end."
1. Quantify the effect of the three problems on year-to-date net income, state your assumptions, and give the correcting entries.
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Assumptions: all three items fall inside the year-to-date period, no tax effects, no other errors, and each amount is fully identified on the card statement.
| Item | Amount | Effect on YTD net income |
|---|---|---|
| Owner transfers booked to Contract Labor | $3,500 × 5 = $17,500 | +$17,500 |
| Card payment booked to Office Expense | $2,900 | +$2,900 |
| Personal charges in business expense accounts | $1,240 + $600 = $1,840 | +$1,840 |
| +$22,240 total |
$11,300 loss + $22,240 = net income of $10,940. The business is not losing money; the books made it look that way.
Entries:
- Dr Owner's Draw (equity) 17,500.00 / Cr Contract Labor 17,500.00
- Dr Credit Card Payable 2,900.00 / Cr Office Expense 2,900.00
- Dr Owner's Draw (equity) 1,840.00 / Cr Office Expense 1,240.00 / Cr Vehicle Expense - Fuel 600.00
Note on #3: the charges stay on the card - the payable is real. What changes is who bears them: the owner, through the equity account, rather than the business as a deduction. Check whether any 1099-NEC was filed off the $17,500 Contract Labor line; if so, that is a separate problem to raise, and a payroll-tax question, not a bookkeeping one.
2. Explain why problem (2) double counts, how you would have spotted it from the register, and what the card liability balance looks like right now.
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Why it double counts: every individual charge on that card - fuel, supplies, the home-improvement run - was already recorded as an expense when it came through the feed. Recording the payment to the card as another expense books the same money a second time. A card payment is a transfer: cash out, liability down. It is never a cost.
How the register would have shown it: scan the bank register for payees whose names match a credit card issuer and check the assigned account. Any payment to a card company categorized to anything other than the card's liability account (or a transfer) is wrong. A quick secondary check: open the card account in the chart of accounts and look at its running balance against the statement - they should agree after each payment.
Current state of the liability: because the payment never hit the liability, the underlying charges are all still sitting there unpaid. The card payable is overstated by $2,900 relative to the lender's statement. Depending on how the account is set up in QBO, that can show as a payable larger than the statement balance, or as an odd debit/asset balance on a credit-card-type account - a reliable tell that a payment went to the wrong place.
Do the same pass over the whole year, not just this one payment; payments like this tend to be habitual once they start.
3. How do you respond to "my accountant fixes that at year end," and what three controls would prevent a repeat?
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Response: the year-end preparer can only work with what is in the file, and reclassifying $17,500 of Contract Labor into equity requires knowing what it was - which means someone has to ask the owner, document the answer, and post the entry. Three practical consequences of waiting:
- Tax risk, and it runs the wrong way. Draws booked as an expense overstate deductions and understate taxable income. That is an underpayment, with interest and penalties, not a windfall. Correcting it in December rather than now does not remove the exposure; it just shortens the runway for estimated payments.
- Decisions get made on wrong numbers. A $11,300 loss and a $10,940 profit lead to very different choices about hiring, pricing, and whether the owner can take another distribution.
- Year-end cleanups are expensive. Every hour of reconstruction is billed at the preparer's rate instead of being handled in a routine monthly close.
Say this once, calmly, and offer to do the cleanup as a discrete project with a fixed scope.
Three controls:
- Separate money. A dedicated business card and account, with owner draws on a fixed monthly schedule posted to a named equity account - never to an expense account.
- A written expense policy. Receipts required; the owner certifies in writing each month which card charges were personal; mixed-use items (the truck) get a documented business-use percentage rather than an all-or-nothing guess.
- A monthly close with owner sign-off. A one-page P&L and balance sheet the owner actually reads and approves, plus a quarterly look at the equity accounts and every card liability against its statement. Problems caught in a 30-day cycle are cheap; problems caught in month fourteen are not.