Each year, business owners provide financial information—anything from a paper-heavy shoebox to a meticulously kept electronic file—to their tax practitioner to create a tax return. Regardless of what the accountant receives, he or she will nearly always have to make adjustments before the return is filed. When that happens, ask for a copy.
Why bother? Because adjustments are often made to increase or decrease expenses in the current year. These changes, in turn, can affect next year’s tax return. We hate to see businesses lose a deduction or overstate their income, thereby paying too much in taxes.
Adjustments typically fall into one of four categories:
record depreciation. Your accountant traditionally creates and maintains
depreciation schedules on all of your reported capital assets. These must be
recorded at least annually, although some companies record depreciation more
2. To adjust for owner or partner draws (sole proprietorships, partnerships, most LLC’s) in order to allow users to see what they have withdrawn in a single year rather than over the entire history of the company.
3. To adjust for pre-paid costs or accrued expenses and/or payroll.
4. To correct data entry errors. A common example is the classification of a truck loan payment as an expense rather than as a reduction to a loan balance.
Adjustments related to “stuff the accountant does” are important but more or less beyond your control. You probably don’t have access to depreciation figures, and the more advanced adjustment tasks are beyond the useful knowledge of most business owners. However, data entry errors should be identified and fixed. Stopping whatever it was that needed to be corrected can significantly reduce your tax-preparation expense. Ask your tax preparer how you can better enter the data for more accuracy. You may find that the information you get from your own books is more accurate and can be used to make better pricing and costing decisions.
Use adjusting entries as a means of aligning your financials with your tax returns, as well as to fine-tune your data entry process to improve accuracy. And even add to the bottom line!