Lydia writes:

Hello, I am an accounting Intern in a small business. My boss has a  quite a few accounts that are very unorganized (ex: dummy account that has a mix of different expenses, accts payable, accts receivable) with unreasonable ending balances. I am finishing up my junior year of college…im know I have the qualifications to manage his accounts but im not quite sure where to begin in terms of organizing all his jumbled accounts. Any suggestions on where to begin, or at least a road map of how to start getting his accounts accurate and in order?
Thank You
My reply:
Hello Lydia, thanks for visiting.

When I encounter a client who has accounts as you described I assume that even the accounts that look “clean” are not.  I’ve found this to be a correct assumption more times than not.  Thus, I’d start with the balance sheet accounts, specifically cash and work my way down.

If cash is in balance and all bank reconciliations have been done that’s a great start.  This means that everything that went through cash has been entered.  Whether or not it’s been entered properly is a different story, as you know.

After cash, the next big account to reconcile is Inventory.  The best way to reconcile inventory is against your physical count.  Physical inventory should be taken at least once a year, usually at the end of the year; thus, if you’re in the middle of the year this may be extremely hard to reconcile at this point.  Thus, I’d skip it for now and remember that it hasn’t been reconciled.  If this is a service industry then you probably won’t have inventory, which will make your task much easier.

I’d take a look at fixed assets next.  Many businesses have an “inventory” of their fixed assets because they pay property tax on them.  If your business has this then compare the totals.  If not, walk around and see what your company is using and make sure it’s on your fixed asset list.  If you see something that’s not on your list, check your expense accounts and your dummy accounts, you just might find it.

After fixed assets the next big account to reconcile is Accounts Receivable.  Make sure the balance agrees to each individual customer balance.

After you’re done with all the assets, start reconciling the liabilities.  Reconcile loan balances to the loan statements.  For accounts payable you’ll have to add up all the invoices that have yet to be paid and make sure it agrees to the total in accounts payable.  Continue this until you’re done with the liabilities.

As for the equity accounts, common stock, treasury stock, paid in capital usually won’t change from year to year (unless you have new owners coming in and past owners leaving).  The only account you’ll have to reconcile is retained earnings (if you have it - depending on your entity type this may have a different name).  The beginning balance should equal last year’s ending balance reported on the business tax return.  The current year activity should equal the net income for the current year thus far.

Once you’ve made it this far take a look at what’s left in your dummy accounts.  Hopefully most of the items are now gone and you can simply reclassify what’s left.

I hope this helps.  It’s usually a long tiring process cleaning up messy books.  It’s also a necessary process and the tax return cannot be correctly prepared if the books are not accurate.

Best wishes,
Gina

P.S.  Good luck in school.