From Setup to Success: Your Go-To Guide for Clean Financial Records

So you’ve set up your books, perhaps in one of our Set-up & Training Workshops; now what?

Keeping your books clean and up to date is essential, especially in the highly regulated financial services industry. Auditors will request a Balance Sheet, P&L, General Ledger, and Reconciliation reports. Having your accounting in a system such as QuickBooks Online allows you to easily pull these reports at a moment’s notice. While bookkeeping is one of the first things we suggest outsourcing, we understand that, as a new business, budgets can be tight. Until then, I am here to give you some key starting points to properly maintain your books.

Step 1: Categorizing Expenses

You can categorize transactions from the banking tab on the left menu bar to the appropriate account from your Chart of Accounts. See the Michael Kitces COA here. If you haven’t linked your bank accounts yet, you can do so by clicking “link account” on the banking screen. 

To categorize your expenses, click on the item you wish to work on. At the top, you will see an option to choose “Categorize” for expenses & deposits, “Transfer,” or “Record as credit card payment.” Select the appropriate box. Include the vendor/customer and account category. 

Some key things to look out for:

• Be sure to include vendor names when categorizing. This is important when you file 1099’s for tax season. It saves you the hassle of returning and fixing them later! Want to know more about 1099’s? See our 1099 blog post. 
• Do not exclude transactions unless they truly did not happen in your bank account and were a QuickBooks glitch, as this will throw off your reconciliation.
• You can get specific, but not too specific. For example, you may like to create sub-accounts for your Legal & Professional accounts, such as Compliance, Accounting, and Bookkeeping. This will help you keep those important categories organized. However, some accounts are better left broader. For example, Software and Technology can often have so many types of vendors that grouping all software into one overarching account is cleaner.
• Beware of putting everything to Office Expenses. While many expenses can fall under this category, knowing what types of things should be recorded elsewhere is essential. For example, any purchases for assets that cost more than $2,500, such as furniture, should go to your Fixed Assets account and be depreciated yearly. Business Meals should go to your Meals account since they are only 50% tax deductible. Office software should go to Software and Technology. Essentially, if there’s an account that allows you to get a bit more specific, use it! 
• Do you have some personal expenses paid from your business account? Don’t panic! Simply categorize those expenses to your “Member Equity” account, with the vendor's name as the payee. 
• Use Rules to help you categorize. If you have vendors that always go to a certain account, create a rule to save you the hassle. See our blog post, How to Create Bank Rules, for more details. 

Step 2: Categorizing Income

• This is where things can get tricky for the Financial Planning Industry. Depending on your state requirements and billing frequency, you may need to do a series of journal entries (see step 3) to correctly record your income according to your state’s regulatory requirements. If you are unsure what your requirements are, please check out XYPN Books’ weekly office hours on Wednesdays from 1-2 MST (zoom link in the member portal), and we can help! Our Set-up & Training Workshops walk you through step-by-step as well. 
• When categorizing income from third-party payment processors like AdvicePay, split out the transaction to capture the gross revenue and the merchant fees so you are not understating your income.

Step 3: Accrual Entries for Advanced Income

• (On a cash basis or bill in arrears? Billing monthly? Skip to step 4!)

  As a financial planner, you may notice your state regulations require GAAP for your financial documents, meaning you must use accrual-basis accounting. If this applies to you, and you bill quarterly in advance, you’ll need to break out your income over the following three months of the quarter. Let’s use an example to explain:

  Example: You receive $10,000 in AUM fees in January for the first quarter:

  1. Instead of booking it to your AUM fees income account, book it to your Unearned Income account on your Balance Sheet. If you haven’t yet, set it up as “Other Current Liability” for the account type.
  2. You need to recognize this income over January, February, and March via three journal entries with end dates 01/31, 02/28, & 03/31. The amount will be $10,000/3, debiting Unearned Income and crediting your AUM income account. All three entries will be identical aside from the dates. Sometimes, you may need to adjust one entry’s amount by a cent or two to account for rounding. The final Unearned Income account balance should be zero. 

  

Step 4: Books Review Tab

Before reconciling, I always check my “Books review” tab on the left menu. This super useful page highlights any transactions that are missing payees or were marked as uncategorized. These are important items to clean up on a monthly basis. You can also view the accounts that are regularly reconciled and when they were last reconciled. 

Step 5: Reconcile!

Reconciling your books monthly is one of the most important steps to ensuring your books are accurate and up to date. Auditors will also ask for Reconciliation Reports, so it is not something to sleep on!

Reconciliation involves comparing transactions in QuickBooks to transactions on bank statements to resolve any discrepancies. Check out QuickBooks’ How to Reconcile video for more detail. The goal is to have no differences between your statement and what you have on your books at the end of each month. However, we all know things don’t always work out so nicely! Below are some tips for resolving issues on the reconciliation page.

• Is your reconciliation not giving you the pretty green $0.00 check mark? Personally, the last thing I want to do is leaf through each transaction. First, I check my reconciliation information. Did I get the correct end date and amount?
• Next, I will uncheck any transactions that are on or close to the end date and see if that fixes the issue. Sometimes, transactions on the cusp will not post until the following statement.
• Next, I go to my banking screen and make sure there are no transactions sitting in the bank feed within the date range I need. 
• I may search for the amount that the reconciliation page is off by. Perhaps I booked, say, a Credit Card payment to the incorrect account. 
• If none of these steps are working, the next step is to go through each transaction on the statement and check the corresponding transaction on the reconciliation page. Through this process, you will find transactions that are missing from QuickBooks or transactions that were inappropriately booked to the account you are reconciling. Sometimes, you may need to manually enter expenses, payments, or cash-back rewards into the account. You can do this by clicking “Bank register” from the reconciliation page, then selecting the drop-down arrow and choosing the appropriate action:

• Although it may be tempting, do not exclude transactions from the reconciliation page unless it makes sense. Sometimes, QuickBooks will duplicate transactions. This is one example of when it is okay; however, most times you can resolve differences with the methods listed above.

Step 5: Review Your Monthly Reports

It is always a good idea to review your Profit & Loss and Balance Sheet on a regular basis. This allows you to look over your income, expenses, and liabilities to ensure there are no mistakes. Check out our blog post, How to Review Your Books, for more details!

Hopefully, this step-by-step guide was helpful in getting you on your feet and properly maintaining your books. While this provides a broad overview, there often are nuances to each unique set of books. If you are feeling like throwing in the towel so you can focus on what you love, Connect with the Books Team. After all, bookkeeping is what we love!