Key takeaways
- Agree the cleanup period and the ending balance before starting.
- Reconcile every account to a statement, not to a transaction export.
- Separate the cleanup from the current monthly close.
- Check whether the cleanup changes a filed tax return before you call it done.
Scope the cleanup
Agree the first and last month of the cleanup, the ending balance and the reason for the work. The reason may be a tax return, a loan application, a sale of the business or a new bookkeeper.
A cleanup that starts without an ending balance can run forever. The ending balance is the finish line, and it should agree to a statement or a prior return.
Decide whether the cleanup is a separate project or part of the monthly engagement. A cleanup that is hidden inside the monthly fee becomes an unprofitable project.
Get the statements
Get a statement for every bank, card and loan account for every month in scope. The statement is the anchor; a transaction export is not a substitute.
If a statement is missing, ask the client to request it from the bank. Document the request and the bank's response, so the cleanup can show why a month is estimated.
Get the prior bookkeeper's trial balance and close package if there was one. The prior balance is the starting point; without it, the cleanup has to rebuild the opening balance from the statements.
Reconcile the opening balances
Reconcile the first month in scope to the statement before recording anything else. If the opening balance does not agree, the difference has to be explained before the cleanup can move forward.
Reconcile each account in order: bank, card, loan, then the balance sheet accounts that depend on them. Do not move to the next account until the current one is explained.
Document the opening balance and the source. The next bookkeeper should be able to see where the balance came from.
Fix the categories
Fix the categories that change the tax return first: income, cost of goods sold, payroll, owner draws, fixed assets and loans. The smaller expense categories can wait until the major lines are right.
Do not recategorize every transaction. A cleanup that tries to perfect every line takes longer than the client will pay for. Focus on the accounts that change the return or the balance sheet.
Keep a list of the adjustments with the reason and the support. The list is the cleanup's audit trail and the client's explanation.
Handle the tax return impact
Check which periods already have a filed return. If the cleanup changes income, deductions or assets on a filed return, the client may need an amended return.
Do not assume an amendment is required for every adjustment. A small change in an expense category may not change the tax. A change in income or a fixed asset usually does.
Tell the client what changed and what the options are before the cleanup is closed. The client should decide whether to amend, not discover it later.
Review and sign off
Review the cleanup summary with the client: the period, the opening and ending balances, the major adjustments and the open items.
Get the client's written approval of the cleanup before the books are used for a return or a loan application. The approval is the client's acknowledgment that the numbers changed.
Give the client a copy of the cleanup summary and the adjusted trial balance. The next bookkeeper will need both.
Prevent the next cleanup
A cleanup is a symptom of a monthly process that did not happen. The fix is a monthly close with a due date, a checklist and a reminder.
Start the monthly close in the month after the cleanup ends, not months later. The first clean month is the easiest month to keep clean.
Review the first three monthly closes after the cleanup with the client. The review catches the habit before it slips.