Many business owners who have small businesses and/or start up businesses may find it annoying that their Accountant and/or Tax Professional asks them too many questions to file their business income tax returns, or Schedule C. They may think that the question or questions are irrelevant or too analytical. Amazingly, there are Accountants and Tax Professionals who think the same way. These Accountants and Tax Professionals need to be properly trained.
Questions are extremely necessary when a small business and/or a startup business does not have any bookkeeping system whatsoever. They are just as necessary if the business owner or owners themselves do the bookkeeping for the business instead of hiring external Accountants and/or Bookkeepers or hiring a Bookkeeping or Accounting professional to perform the work internally.
A particular type of question is important when a business owner or owners does their own bookkeeping, particularly when there are two comparative years available – the current year and the prior year. This type of question is referred to as an analytical question.
Analytical questions pertain to a significant decrease or increase in any general ledger account within the bookkeeping system between the prior year and the current year. Significance is defined by every Accountant and/or Tax Professional. No, the assumption reason, without asking, is not because this is how business operates.
Business owners who perform their own bookkeeping can quite easily skip recording some transactions because they are busy with their business. Such analytical questions address if this is indeed the case.
Small business owners tend to receive their Completed business income tax return, or Schedule C, from their Accountant and/or Tax Professional, and they have a sense that their business had more revenue, or less revenue, than what is stated on the business income tax return, or Schedule C. Likewise, many business owners may say that the expenses that they had for their business are more or less than what is stated on the business income tax return, or Schedule C.
The proper time to address any missed bookkeeping entries is while the processing and preparation of the business income tax return, or Schedule C, is in progress, and not when the business owner has a Completed copy for his or her review.
Questions are significantly reduced during the processing and preparation of small business income tax returns, or Schedule C, if the business owner or owners has a bookkeeping system that is prepared and maintained by external and/or internal professionals.
WHY IS THIS IMPORTANT?
An incomplete and inaccurate bookkeeping system will generate inaccurate and incomplete financial statements and inaccurate and incomplete business income tax returns, or Schedule C. The business owner or owners may make business decisions based upon inaccurate and incomplete financial statement information. Such decisions include expansion, hiring, the amount of salary, and the amount of any distribution and/or dividend that can be paid from the business, if it is allowed to do so.
Another situation is when a third party, such as a bank or other lender, requests a copy of the financial statements and/or business income tax returns, or Schedule C, for a particular year or years, and denies a requested loan because the gross revenue as reported is not enough. Perhaps, the gross revenue would have been enough if analytical questions were asked and missed revenue discovered.
Prepared by: Angelo Liberati, BBA, CPA, MST
Accountants on Air
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