Three Reports That Tell You Whether Your Books Are Right

Why the order of the three reports matters

Most owners open the profit and loss first, because it answers the question they care about, which is whether the business made money last month. That's the wrong place to start. The profit and loss sits on top of every transaction somebody categorized, so if those don't match what really moved through the bank account, the number at the bottom is confident and wrong. Read them in the order that catches errors earliest: reconciliation, then balance sheet, then profit and loss.

Report one: the bank reconciliation report

This report compares what your books say happened in the bank account against what the bank says happened. Run it for a closed month, not the one you're in. In QuickBooks Online it sits under Reports as the Reconciliation Report, and it prints a short summary with a list of uncleared items underneath.

What you're actually looking for

The summary should show a difference of zero between the cleared balance in your books and the ending balance on the statement. If there's any other number in that spot, stop reading the other two reports, because nothing built on top of it can be trusted. Then look at the uncleared list. A check written three weeks ago that hasn't cleared is ordinary, but a deposit that has sat uncleared since the spring is not, and it usually means income was recorded that never arrived, or recorded twice. A clean zero sitting above two pages of stale uncleared items is worth a direct question.

If nobody has been reconciling every month, that's the first thing to fix, and it's the spine of what monthly bookkeeping is supposed to cover in the first place.

Report two: the balance sheet, where errors collect

The balance sheet is the report owners skip and accountants read first. It lists what the business owns, what it owes, and what's left over, all on one date. Categorization errors don't disappear on their own: they land here and stay, month after month, which is what makes this report useful to you rather than only to whoever prepares the return.

The lines that catch most problems

Look at cash first and compare it against your actual bank balance on the same date. Then look for accounts named Uncategorized Income, Uncategorized Expense, Ask My Accountant or Opening Balance Equity. Each of those is a holding pen for transactions nobody decided about, so a balance in any of them means the decision was postponed rather than made. Opening Balance Equity should be zero once a file has been set up properly, which is why a number there usually points back at a rushed QuickBooks setup rather than at anything that happened in the business last month.

Then check whether the payroll liability accounts make sense to you. If the books say you still owe payroll taxes you know you already paid, that payment got categorized somewhere it doesn't belong, and your expenses are overstated by the same amount it was worth.

Report three: the profit and loss, read last

Once the first two reports hold up, the profit and loss is worth reading, and the trick is not to read a single month. Put it in a column-by-month view across the last twelve months and scan along each row. You're looking for a number that jumps. Rent that reads the same every month and then triples once is usually a duplicate, or a payment posted to the wrong account. Revenue that falls to nothing in a month you remember being busy means invoices never got entered, or deposits landed in a balance sheet account instead of income.

Then ask whether the categories are ones you'd use to make a decision. A profit and loss with one enormous line called Supplies can be perfectly accurate and still useless. If you can't tell from the report where the money went, the chart of accounts was built to file a return rather than to run the business, and that's a different problem from the books being wrong.

Which of these situations is yours?

The reports reconcile but you still can't read them

That's a structure problem rather than an accuracy problem. The books are right, and the chart of accounts doesn't match how you think about the business. It's the cheapest of the three to fix, because nothing has to be rebuilt, only reorganized and kept that way.

The reconciliation has old uncleared items

Ask about specific ones by date and amount rather than about the list in general. Ordinary timing differences clear within a few weeks. Items that have sat since a previous quarter are either errors or transactions that were never real, and each one distorts both the balance sheet and the profit and loss until somebody looks.

Nobody has sent you a balance sheet at all

Ask for one for the last closed month. If the answer is that it isn't ready, or that a balance sheet only gets produced at year end, that answer is the finding. A month that has genuinely been closed produces all three reports on the same day, and somebody who can't produce a balance sheet on request is usually not reconciling either.

How often is this worth doing?

Once a month, on the month just finished, and it's a short sitting once you know which lines to look at. Most owners only do it at year end, which is the worst possible timing, because by then a single recurring error has been repeated eleven times and the fix is eleven corrections. Our office is in Trumbull, Connecticut, in Fairfield County, and we serve small businesses across the state and throughout the United States. Wherever the business sits, these are the same three reports.

What to ask when something looks wrong

Ask narrow questions, because narrow questions produce answers you can check. Rather than asking whether the books are up to date, ask for last month's reconciliation report and the difference printed on it. Rather than asking whether everything has been categorized, ask what's sitting in Uncategorized Expense and Opening Balance Equity right now. Somebody doing the work answers both quickly, because those are the reports they ran to close the month.

None of this means you need to change anything. Plenty of books are in good shape, and the point of the three reports is that you can confirm it for yourself instead of hoping. If the checks turn up something nobody can explain, that's the moment to get a second pair of eyes on the file, and you can reach us through the contact page or on (267) 710-6742.