My Profit & Loss Doesn’t Look Right.

How Do I Know if My Books Are Accurate?

You’re looking through your books and pull up your Profit & Loss report. Something just doesn’t look right.

Maybe the profit seems much higher than you expected. An expense you know you’ve been paying every month barely shows up. Sales look right, but you know the business didn’t actually make that much money.

Or maybe you can’t point to one specific number. You just know the report doesn’t match what you’ve experienced in the business. Pay attention to that insight.

Business owners usually know their businesses pretty well. You may not know exactly what’s wrong with the bookkeeping, but you know what kind of month you had. If the numbers don’t seem to reflect that, it’s worth looking into.

It doesn’t automatically mean your books are wrong. But I wouldn’t ignore it either.

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First, does the report make sense?

One of the first things I do when I’m reviewing a set of books is simply ask whether the numbers make sense.

I’m not just looking to see if all the transactions have categories next to them. I’m looking at the business as a whole:

• Does the revenue make sense based on what actually happened?
• Are the major expenses there?
• Did payroll suddenly jump?
• Is an expense much higher or lower than usual?
• How does this month compare with previous months?

Sometimes there’s a perfectly reasonable explanation. Maybe an annual insurance payment hit this month. Maybe you had an unusually large repair expense. Maybe sales are seasonal.

But sometimes that weird number is the first clue that something else is going on. I go down those rabbit holes.

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A profitable-looking P&L can still be wrong

I recently worked on the books for a retail business whose financial statements showed a surprisingly strong profit.

The sales weren’t necessarily the problem. Inventory was.

The business had purchased a substantial amount of product for resale, but the costs of the products being sold weren’t properly making their way into Cost of Goods Sold. Some of the inventory items didn’t have reliable costs associated with them at all.

Here’s a simple example of what I mean:

If you sell something for $100 that cost you $60, you didn’t make $100. Your gross profit is $40. If QuickBooks records the $100 sale but not the $60 cost, your business can suddenly look a whole lot more profitable than it really is.

And this wasn’t something I could fix by changing a few categories. I had to take a look at the inventory records and how the accounting was being handled.

That’s the thing about financial statements. The problem you’re seeing on the P&L may actually be coming from somewhere else in the books.

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Reconciled doesn’t always mean accurate

I talk about reconciliations a lot because they’re one of the foundations of accurate bookkeeping.

When you reconcile a bank or credit card account to their monthly statement, you’re comparing your books against documentation from an outside source. That’s important. And save those statements! You want that documentation.

Reconciliation is one of the most important parts of good bookkeeping. But it doesn’t tell you that everything was recorded correctly.

• A loan payment can clear the bank and still be recorded entirely as an expense instead of being split between principal and interest.
• A transfer can be recorded as income.
• A credit card payment can be recorded as another expense even though all of the individual credit card purchases were already recorded.

And guess what? Even with all these issues present, the bank account can still reconcile.

So when I hear that the books must be accurate because everything is reconciled, I always want to know what was reviewed after the reconciliation.

PRO TIP:
Once the bank and credit card accounts are reconciled to their statements, I review each account in the general ledger to make sure the transactions actually make sense there.

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Don’t forget the Balance Sheet

If something looks wrong on your Profit & Loss, take a look at your Balance Sheet too. Honestly, this is where some of the more interesting clues tend to show up.

• Are there balances that have been sitting there for years and you don’t know what they are?
• Are there negative balances that don’t make sense?
• Clearing accounts that never clear?
• Does the loan balance resemble what you actually owe?
• Do your accounts receivable and accounts payable make sense based on who actually owes you money and who you still need to pay?

You don’t have to know how to fix these things. You’re just looking for things that make you stop and say, Wait. What is that?

Sometimes I pull up a Balance Sheet and there are big problems that stand out right away. Other times, it’s a handful of smaller things that don’t look quite right. Either way, those balances give me a place to start asking questions and digging into what actually happened.

The P&L is only one part of the story. If I’m trying to determine whether a set of books is accurate, I want the Balance Sheet to make sense too.

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So, what should you look at?

If your P&L doesn’t look right, start with the obvious things.

Make sure you’re looking at the right dates. Check whether you’re viewing the report on cash or accrual basis. Compare it to previous months or the same period last year. Look for expenses that seem unusually high, unusually low, or completely missing.

Then step back and look at the books as a whole. Are the accounts reconciled? Are there unexplained balances? Does the Balance Sheet generally make sense based on what you know about your business?

You’re really trying to answer one question:

Do I trust these numbers enough to use them to make decisions about my business?

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What if you find something wrong?

Finding something that looks wrong doesn’t necessarily tell you what needs to be fixed. It gives you information for the next set of questions.

• Is it one transaction that was recorded incorrectly?
• Is there a problem with how something has been handled for months or years?
• Are the reconciliations behind? Is an account set up incorrectly?
• Is information coming into QuickBooks incorrectly from another system?
• And most importantly, how much of the financial reporting is actually affected?

That’s what I want to understand before recommending a cleanup or any other work. It’s also why I offer diagnostic and file reviews at Lawley Bookkeeping & Accounting.

The review isn’t the cleanup itself. It’s a way to look through the books, identify what’s going on, and determine not only what needs to be fixed, but whether there are better processes that can make accurate, up-to-date books easier to maintain year-round.

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A Final Thought

Your financial statements hold a lot of information. Sometimes it’s a number that doesn’t make sense, a stale balance that’s been on the books for years, or a profit that doesn’t match what you know happened in the business.

That’s why I look at where the transactions are categorized and the accounts are reconciled. I want the P&L and Balance Sheet to make sense together and reflect what’s really happening in the business.

In the end, that’s what accurate bookkeeping should give you: financial statements you can understand, trust and use to make decisions about your business.

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