Whether you do your own bookkeeping or work with a bookkeeping services provider, you should aim to reconcile your books to your tax return every year. As a provider of bookkeeping services, one of the first things I do when I take on a new client is a reconciliation between their last tax return and their QuickBooks' general ledger. Ensuring that the client's QuickBooks file is on the same page with the CPA's records makes it much easier for my team, the client, and the CPA to communicate about the numbers, especially when it is time for tax planning as well as preparing for the next year's tax filing.
One of the most common reasons why the tax return and the QuickBooks file may not agree is due to the accounting method used for each purpose. Your tax return may be filed on a cash basis while your QuickBooks may be kept on an accrual basis. Under the cash basis method, income is not counted until cash is received, and expenses are not counted until they are paid. Under the accrual basis method, income is counted when the sale occurs, and expenses are counted when you receive the goods or services. It is very beneficial for the business to keep QuickBooks on an accrual basis as it will provide more meaningful information in terms of how the business is operating within a specific time period. The cash basis method will not match up the actual revenue earned and expenses incurred for that period, as it is reporting based on what is coming in and going out of the cash accounts. Therefore, when you reconcile your tax return to your QuickBooks file at the end of the year, understanding any differences between the QuickBooks numbers and the tax return due to this difference in accounting method is one of the primary components of this reconciliation.
You may also need to make adjustments or note differences related to depreciation expense, as you may wait for your CPA's entry to post this annually, or you may have a different calculation method for your books vs. what your CPA uses for the tax return. Another common difference is the accounting of meals and entertainment expenses, as 50% of meals and entertainment related costs are not deductible, but 100% will be included for the books. A reconciling item will then be needed for 50% of the business meals. You may also adjust the equity section of the balance sheet, especially in working with partnerships, so that the capital accounts for the member/owners are accurate.
To do your reconciliation, collect and enter into adjusting journal entries from the CPA, as well as their final trial balance. Post any adjusting journal entries and then compare the QuickBooks file to the final trial balance to determine if there are any differences. Any differences to be corrected you can solve through additional adjusting journal entries. There may also be differences, based on the difference of accounting method, above, which you can note on your reconciliation. It is a bookkeeping services best practice to share this reconciliation with the CPA so they understand the QuickBooks file numbers in context with the tax return. This will help the CPA to hit the ground running as the prepare for your client's next filing!