Bookkeeper Not Reconciling? How to Check Their Work Yourself

How do I know my bookkeeper is really reconciling my accounts?

A bookkeeper is reconciling an account when the statement's ending balance, adjusted for the listed unmatched items, equals the books' balance on the same date. The IRS advises reconciling the business checking account each month. Ask for the report on every bank and card account, with the date each was last reconciled. A bookkeeper who is not logging in or reconciling on time shows up first as an account whose last-reconciled date is months old. The date shows the account is behind, not why: the cause can be the bookkeeper, missing statements or lost access, so ask.

A case is not simple when:

• the bank and the books disagree and you cannot tell a timing gap from a real error;
• months were never reconciled, so errors have had time to pile up;
• the books show cash the bank does not have;
• payroll or sales tax in the books disagrees with the IRS or the state;
• a return was filed from books that were not reconciled;
• the business is a partnership or corporation that must complete Schedule L, a balance sheet that has to agree with the books.

Gather first: a statement for every account for the months in question, the last two filed returns, three months of reports from the books (balance sheet, profit and loss, reconciliation reports), payroll reports and filed Forms 941 and 940, loan statements, the Forms 1099 the business received, and the IRS records for the business: account balance, payment history and transcripts.

A connected bank feed is not a reconciliation; see bank feeds versus reconciliation.

What should a monthly reconciliation show, and what do I ask to see?

A monthly reconciliation shows that the books agree with the bank once every timing gap is listed. The IRS steps are to compare deposits and cleared checks with the books, list what has not cleared, enter bank charges the books lack, then confirm the adjusted statement balance equals the adjusted book balance.

For the routine around it, see the month-end close checklist.

Why does the bank balance not match what my books say?

The usual causes are timing, bank charges the books lack and entry errors. The IRS names the first two: a statement can include charges not yet entered in the books, and it leaves out deposits made after the statement date and checks that had not cleared. Its example also includes a deposit entered with the wrong amount.

A timing difference has a name and a date and usually clears by the next statement. A difference nobody can tie to a specific item is an error, a missing entry or money that moved without being recorded. When the books show more cash than the bank, look for payments never entered, deposits entered twice and transfers entered on only one side. For card and online-payment deposits, see matching sales, payouts and Form 1099-K.

If the opening balance on the reconciliation itself is the problem, see reconciliation beginning balance wrong.

What do large uncategorized, suspense or clearing balances mean?

A large uncategorized, suspense or clearing balance means money moved and nobody decided what it was. The IRS says the source of receipts is needed to separate business from nonbusiness receipts and taxable from nontaxable income, and that the books must show gross income, deductions and credits. Until the balance is sorted, the profit and loss statement may be wrong by an unknown amount.

A clearing account is a temporary stop for money in transit, such as a batch of card sales waiting for its deposit, and normally returns to zero when the matching entry arrives. A suspense or uncategorized balance has no such exit. Ask three questions:

1. Which entries make up the balance?
2. How old is the oldest one?
3. Who decided each entry, and from what document?

See uncategorized expenses before tax time, opening balance equity and a profit and loss statement that looks wrong.

Does my balance sheet make sense: negative cash, odd loans, owner equity?

A balance sheet makes sense when each line can be traced to a statement or a document. Four lines are worth checking first.

Returns apply the same test. The instructions for Form 1065, Form 1120-S and Form 1120 each say the Schedule L balance sheet should agree with the entity's books and records. On an S corporation return, loans from shareholders should generally reconcile to the amounts on the Schedules K-1.

See what a small business balance sheet should show and negative owner's equity.

Do the payroll and sales tax amounts in the books match what the IRS and the state show?

The payroll and sales tax in the books should match the IRS and state records, period by period. The employer, not the bookkeeper, is responsible for federal payroll deposits even when someone else makes them (IRS), so the IRS record, not a bookkeeper's report, is the better evidence of whether a deposit arrived; a gap is a reason to ask, not proof that a deposit was never made. If a certified professional employer organization pays the wages, it is generally the employer for them, so its account, not the business's, may hold those deposits; ask it for its reports. The business can still be liable (IRS).

Where to look:

• IRS Business Tax Account: with full access, shows the account balance by year, payment history, transcripts and notices. Who can register depends on entity and role: a sole proprietor with an EIN who files Schedule C, a general partner or managing LLC partner, or a corporate officer or managing member who is a current employee with a W-2 for the latest filing year and can legally bind the corporation. A partner or shareholder with a Schedule K-1 gets limited access: no notices, and only the older tax years with a K-1 on file that the IRS lists, which may stop before the period you are checking. An LLC that files as a sole proprietor on Schedule C cannot yet register (IRS).
• EFTPS, transcripts and Form 8821: an employer who enrolled in the Treasury's payment system sees its payments with its own PIN (IRS). A business can enroll even without Business Tax Account, but its history reaches back only about 15 to 16 months, as two IRS pages differ (IRS). A tax account transcript for the business, ordered with Form 4506-T or through the IRS business line, shows federal tax deposits and payments (IRS). Form 8821 lets the business authorize someone else to inspect its IRS records.
• The address on file: the IRS sends correspondence to the address of record and strongly suggests the employer not change it to a payroll provider's address (IRS).
• The state: each state runs its own accounts, and names and rules differ. For sales tax, California lets a taxpayer view returns and payments online. New York's Business Online Services lets an owner or officer see the business's filing and payment history for its New York State taxes. See sales tax payable does not match the return.

A monthly depositor deposits by the 15th day of the following month; a semiweekly depositor, by the next Wednesday for pay dates Wednesday through Friday and by the next Friday for Saturday through Tuesday; either, by the next business day once $100,000 or more of tax has accumulated (IRS due dates). An employer whose line 12 tax is under $2,500 this quarter or last, with no such next-day deposit, may pay with the Form 941 instead of depositing, so that quarter can show one payment and no separate deposits. At or above that amount in both quarters, with every deposit on time, line 14 should be zero; a balance due is a reason to ask why. An employer approved for Form 944 files once a year instead, and an employer of farmworkers files Form 943 for their wages (IRS).

A missed deposit adds a failure-to-deposit penalty of 2% to 15% of the unpaid deposit, depending on lateness and notices (IRS). A person responsible for paying withheld tax who willfully fails to, such as an officer, a partner or anyone else who decides which bills are paid, can also owe the Trust Fund Recovery Penalty under section 6672, which equals the full unpaid withheld income tax and employee Social Security and Medicare tax. A letter proposing it gives 60 days to appeal (IRS). The IRS manual puts the usual assessment period at 3 years, with no limit until a return is filed (IRM). See who pays the penalties after a bookkeeper's mistakes and the trust fund recovery penalty.

For payroll balances that will not clear, see payroll liabilities that won't clear.

Do the books start from last year's filed return and match my 1099 income?

Yes: this year's opening balances should equal last year's closing balances, and the income in the books should explain the income on the return and on the forms payers sent.

Opening balances. For a partnership, the Form 1065 instructions say total assets at the start of the year on Schedule L generally must equal total assets at the close of the prior year, with a statement explaining any difference. The corporate instructions linked above say the balance sheet should agree with the books. Compare the last filed return's Schedule L, and its equity, with the books on the last day of that year. A sole proprietor's Schedule C has no balance sheet, and some small partnerships and corporations are excused from Schedule L. Without one, start with the balance sheet saved at last year's close and the year-end bank, card and loan statements, then the filed year's profit and loss against the return.

1099 income. Compare every Form 1099-NEC, 1099-MISC and 1099-K the business received with the income in the books. For an individual's return, the IRS sends a CP2000 notice when payer-reported income does not match the return. A sole proprietor can request a wage and income transcript, but it shows only forms actually filed with the IRS, not necessarily all that were issued. The IRS lists no wage and income transcript among its business transcript types, so a partnership or corporation should ask each payer or platform for its copy. Income is reportable whether or not a Form 1099-K arrives (IRS). A gap is not automatically an error, but each is worth a written explanation kept with the return's records.

See retained earnings that do not match last year's return and matching sales, payouts and Form 1099-K.

How can I tell if old, closed months are being changed?

Closed months are being changed when a figure for a finished period differs between two copies of the same report. Three signs point to it:

• a reconciliation's beginning balance no longer matches the statement;
• a total for last year differs from the copy you saved;
• opening equity no longer matches the saved year-end balance sheet or the filed Schedule L.

Ask three things: the date through which the books are locked, who holds the password, and a list of entries added or edited after that date, if the accounting software keeps a change log. After a return is filed, save the year-end balance sheet and profit and loss as PDFs; the copy is the baseline for next time.

In an examination, the IRS can ask for the accounting software file, and its published FAQ says examiners may review entries created or changed during the year examined. Changing the books after filing does not by itself amend the filed return, but it can mean the return no longer matches the books; whether that matters depends on what changed. See a filed year that keeps changing.

What can I check myself each month in 30 minutes?

Six checks, about five minutes each. Use your own bank, IRS and state logins, and reports exported from the books under an owner login, so you do not depend on the bookkeeper's summary:

1. Ending balances. For each bank and card account, match the statement's ending balance to the statement balance on the reconciliation report, then the report's adjusted balance to the books' balance on that date.
2. Unmatched items. Read the list. Anything older than one statement cycle needs a reason.
3. Balance sheet. Look for negative cash, uncategorized, suspense or clearing balances and loans you do not recognize.
4. Payroll deposits. Compare the IRS payment history with the payroll reports for the month.
5. Sales tax. Confirm in the state account that the period was filed and paid.
6. Closed months. Compare last month's closing totals with the PDF you saved.

If a check fails, ask the bookkeeper in writing which entries explain it. A failure that stays unexplained, or any item in the table below, is the point to bring in a professional.

For giving a bookkeeper access without giving up your own, see giving a bookkeeper access to your accounts.

When should I stop checking and bring in a professional?

Stop checking when a finding needs more than a correction. Each of these does:

If you spend more time fixing the bookkeeper's mistakes than the work would take you yourself, the question has moved from checking to replacing. See replacing your bookkeeper, or taking over books from a former accountant if the bookkeeper has stopped responding.

Example

These examples are illustrative; all figures are in US dollars.

Books show more cash than the bank

A Denver landscaping LLC's books show US$42,000 in cash. The bank shows US$18,000. The March reconciliation was never finished, and US$24,000 sits in an uncategorized account. The first step is to reconcile March to the statement, then go through the uncategorized entries one by one. Until then the profit and loss statement cannot be trusted.

Payroll taxes shown as paid

A dental practice's books show US$9,000 of payroll tax paid each quarter. The IRS account shows two quarters unpaid, US$18,000 in all: the deposits never left the bank. Assume the full US$18,000 was required as deposits, every deposit is more than 15 days late, no IRS notice has arrived and no penalty relief applies. The failure-to-deposit penalty is then 10%, or US$1,800. It becomes 15% (US$2,700), replacing the 10%, if the tax is still unpaid more than 10 days after the first IRS notice or on the day a notice demanding immediate payment arrives, whichever is earlier. Interest and other penalties can apply too.

Opening equity that matches nothing

A consultant's S corporation books show opening equity of US$15,000. That matches neither the closing equity on last year's filed Schedule L nor the year-end balance sheet saved after filing. The file was reopened and a closed year was changed. The first step is the list of entries edited after the return was filed. Whether the return needs amending depends on what that list shows.

Different for you?

• Several months were never reconciled: see catching up on overdue books and cleanup or start fresh to decide between repairing month by month and rebuilding. Start with bookkeeping help when the catch-up is more than you can do yourself.
• Your bank balance and your books disagree, or the reports show cash you do not have, and you cannot tell a timing gap from an error: a professional comparison of statements against the books is how you find out whether they can be fixed month by month or must be rebuilt, and whether anything already filed is affected. Start with bookkeeping help.
• The IRS or a state shows unpaid payroll or sales tax, or you have a notice: see who pays the penalties after a bookkeeper's mistakes. A notice sets a date to respond, so get bookkeeping help early.
• Opening balances or equity differ from last year's closing books or a filed Schedule L: see retained earnings that do not match last year's return and bookkeeping help to check whether the return is affected.
• You are not sure which tasks are the bookkeeper's and which are yours: see what your bookkeeper needs from you.
• The bookkeeper is gone or you are ready to switch: see replacing your bookkeeper.