Years ago, a student approached me when I was teaching QuickBooks® at a local college because they were questioning what their husband’s office manager was doing in their financial software, which is why she was taking the class. He happened to be on vacation that week, and while she was taking the course, she was going through how things were set up and exploring how things were being reported.
One of the accounts she saw when she ran a financial report was “office supplies,” which isn’t unusual, however she saw that it had over $30k in expenses and it was only March, mindful they were on a calendar year for their fiscal reporting. The other problem was that there wasn’t but 5 people in the company, which didn’t make sense to her either.
Well after speaking to the office manager when he got back from vacation, apparently the tax preparer had strongly recommended that they have as few accounts as possible he was doing what he was told. Dumping in everything to one major account. Well the lesson learned from this example I explained to the class, was that the IRS tracks an entity’s industry by the code that gets posted onto the tax return. With that in mind, it also tracks how much is reported with types of income, payroll expenses, rent, etc. and that’s how audits get triggered.
Unfortunately, these parameters are kept within the confines of the IRS. However, there’s still a matter of making sure that everything doesn’t go into a dump account, like “office supplies” because if you don’t have things better broken out then it hurts you two-fold.
The first challenge is that you’re not getting an accurate read of what you’re spending your money on, nor are you gathering key information as to what is happening with what you’re selling. Failure of specific items such as this can often hurt you in the long-term because it fails to identify key factors that can not only help guide your business’ future but also help alleviate potential pitfalls.
The second challenge is that you have too many or duplicate accounts which makes it even more difficult than too few to see what’s going on. It’s easy for people to randomly add accounts without physically checking to see if there’s something similar, and if you’re not careful you can have numerous items that can be condensed down to one. This is something that I often see all too often, and after a lot of merging and parameters set forth with clients, eventually they do understand that many is good up until a point, but too many or too few can be challenging.
In QuickBooks® you have the option of merging or making accounts inactive, for which is perfectly acceptable and encouraged. A few rules of thumb though are:
- Do you have an account that you haven’t used for a few years?
- Are there accounts that reflect the same purpose, i.e. automobile expenses, fuel, etc.
- Is there only one income account and you offer multiple items or services you sell?
Dwayne J. Briscoe