Three Reports That Tell You Whether Your Books Are Right

THUY Nguyen

2 days ago

9 min read

Key Takeaways

Pull three reports from your accounting file, all as of the same date: the balance sheet, the bank reconciliation report and the general ledger detail.
Check one: cash on the balance sheet should tie to the bank statement balance once outstanding items are counted, to the penny.
Check two: no uncleared checks or deposits older than about 30 days without a reason.
Check three: an Ask My Accountant, Suspense, Uncategorized or Owner Clearing account should sit at zero or near it at month end, with a plan to clear whatever is left.
Check four: no round-number entries without a bill, receipt or invoice behind them.
In Texas, sales tax payable, payroll liabilities and the franchise tax accrual should also tie to what was filed and paid.

Three reports, four checks, no accounting degree

You can get a read on your own books by pulling three reports and running four checks on them. The three reports are the balance sheet, the bank reconciliation report and the general ledger detail, all run as of the last day of last month. Set aside a quiet stretch and one date to work from.

Treat this as a health screen rather than an audit. Take a deposit posted twice, or a transfer coded as income, or a receipt that never reached the bookkeeper: in the file, a process gap and a real problem look identical until somebody checks. If you want a sense of when the job has outgrown a bookkeeper, when a Houston business needs a CPA covers that question, and this post is the hands-on version.

Report one: the balance sheet

The balance sheet is a photo of what you own and owe on one day. Run it as of the last day of last month, not as of today, because today's bank feed is still moving.

Four lines matter:

Cash: write down the balance for each bank account.
Receivables: does the total look like money customers still owe you?
Payables: does the total look like bills you still owe?
Odd accounts: anything named Ask My Accountant, Suspense, Uncategorized or Owner Clearing deserves a question.

Report two: the bank reconciliation report

QuickBooks calls it the Reconciliation Report. Xero calls it the Bank Reconciliation Summary. Most accounting programs produce one, and it shows three things: the bank statement balance, the balance in your books, and the items that explain the gap.

A gap is normal. A check you wrote on the 29th might not clear until the 3rd. What matters is how old the items in that gap are.

If your bookkeeper can't produce this report for last month, that's your first real answer. The books might still be right, but nobody has proven them right. Reconciling is the proof step, and it's the step that gets skipped when someone is behind. There's more on what that drift looks like in fixing reconciliation drift before tax season.

Report three: the general ledger detail

The general ledger detail is every entry in the file, in date order, with the account it hit and the memo that came with it. It runs long, so sort it three ways and read the top of each:

By amount, largest first. Read the top twenty.
By memo, blank memos first. An entry with no memo and no attached document is a question.
By type, journal entries only. Manual journal entries are where corrections and shortcuts live.

Lots of entries, few memos and a habit of fixing things with a journal entry rather than a receipt is a pattern worth noticing. It usually comes from someone working fast, and it leaves a file that is hard to check later. That is the work a CPA has to untangle at year end.

The four checks, in order

Work through these one at a time with your three reports in front of you. Look for a pattern rather than a single bad entry: one round number with no receipt is a Tuesday, and twenty of them in a month is a process that needs fixing.

Check 1, cash to bank. Take the balance sheet cash figure and the bank statement ending balance for the same date. The difference should equal the outstanding items on the reconciliation report, to the penny. If it doesn't, ask what makes up the difference.
Check 2, aging of uncleared items. Look at every outstanding check and deposit on the reconciliation report. Anything older than about 30 days needs a reason. A deposit in transit from three months ago usually means money that was recorded but never arrived, or was recorded twice.
Check 3, the parking lot. Any balance in Ask My Accountant, Suspense, Uncategorized or Owner Clearing at month end should be zero or near it, with a plan to clear it. A balance that grows every month means transactions are being parked instead of coded.
Check 4, round numbers with no paper. Sort the ledger by amount and pull the round entries: a $1,500 expense, a $5,000 journal entry, a $900 transfer. Real bills are rarely round, and each one should have a bill, receipt, invoice or contract behind it.

Texas accounts that should also tie

Cash is the account most owners think to check. In Texas, three more balances should tie to something outside your books.

Sales tax payable. If you sell taxable goods or services, the balance at month end should match what you owe the Texas Comptroller for that period. After you file, it should drop to what has built up since. A balance that only climbs means tax is being collected and not paid, or the payments are coded somewhere else.
Payroll liabilities. The balances for withholding and the employer share should match what was actually remitted for the same period. A balance that carries over month after month is a question.
Franchise tax. The accrual for the Texas franchise report should tie to what was filed. The Texas Comptroller sets the annual report due date at May 15, so this is a once-a-year check, done before the report goes in.

Of the three, payroll is the one to look at first. If that balance doesn't tie, move it to the top of your list and get an answer this week rather than next month. Our post on the trust fund recovery penalty in Houston goes through what is at stake when payroll tax goes unpaid.

One allowance is worth making. If a storm or a closure shut you down for a few weeks, the records from that period are often thin, and a single messy month is not a conclusion on its own. Note it, then look at whether the months either side hold up.

What clean looks like, and what to ask when it isn't

A clean answer is boring. Cash ties to the bank to the penny, the reconciliation report shows a handful of outstanding items all from the last two weeks, the parking-lot accounts sit at zero, every round-number entry has a document behind it, and sales tax payable dropped after the last filing.

If that's what you get, the books have passed the screen. Four checks are not a substitute for a professional review, and they don't tell you whether the coding behind the numbers is right, but a clean pass is a good sign and a monthly record of it is worth having. Say thank you, then ask for the same three reports every month.

If something doesn't tie, ask a question with a number in it. Put your own figures where the letters are:

"The balance sheet shows cash of X and the bank says Y. Can you show me what makes up the difference?"
"This deposit has been outstanding for three months. Where is it?"
"What's sitting in Ask My Accountant, and when will it be cleared?"
"Can you attach the bill for this entry?"

How those questions get answered is the real test. A fast, specific answer with a fix attached is a good sign. A vague answer, a long delay, or a fresh report that doesn't match the old one deserves more of your attention than the original gap did.

Which path fits what you found

Keep your current setup if all four checks were clean and the reports arrived the same day you asked. Add a standing monthly request for the three reports and stop there.
Book a one-time review by a CPA if one or two checks were off but the answers came back fast and made sense. A review is the point at which someone looks at the coding behind the numbers, which is the part these four checks cannot reach.
Ask for a full cleanup and a change of process if the reconciliation report doesn't exist, the parking-lot accounts grow every month, or the answers keep changing.
Get an outside review first if payroll or sales tax balances don't tie. Those two hold money that was never yours to spend, so a gap there needs an answer rather than a wait.

A cleanup is a bigger job than a review, and a review is a bigger job than reading three reports each month, so the order above also runs cheapest first. If the wider question on your mind is whether to keep the work in house at all, in-house bookkeeper vs outsourced CPA in Houston compares those two on cost.

Frequently Asked Questions

How often should I run these three reports?

Once a month, as of the last day of the month, after the bookkeeper has closed it. Timing matters: run them mid-month and the bank feed is still catching up, so every check looks like a problem. Ask for all three on the same date and keep them in one folder. Over a year that folder becomes its own proof, and you can hand a lender or a new CPA twelve clean months rather than scrambling. Quarterly is an acceptable minimum. Longer than that isn't.

What if my bookkeeper says the reconciliation report is not available?

Ask when it will be. Accounting programs generate this report when a bank account is reconciled, so a missing report usually means the account wasn't reconciled that month. That isn't proof of anything wrong, and it usually means someone is behind or the bank feed broke. Give a deadline of a week or two. If the report still doesn't appear, or you get a screenshot of the bank balance instead, treat the month as unproven. Unproven books can still be right, but nobody can say so yet.

Cash matches the bank exactly with zero outstanding items. Is that good?

Usually yes, especially for a business that pays everything by card or transfer. If you still write checks, be a little curious. A perfect tie with nothing outstanding sometimes means the reconciliation was forced with an adjusting entry rather than worked out item by item. Look for an account called Reconciliation Discrepancies or similar. An old, small balance there is common and harmless. A new one every month means the reconciling is being papered over.

What counts as too old for an uncleared item?

Use 30 days as a working line. A check written in the last week or two of the month may not clear until the next one, and that's fine. A check from three months ago that still hasn't cleared was either lost, voided without being recorded, or never sent. An old deposit in transit is the bigger worry, because deposits usually clear fast, and an aged one often means the sale was recorded twice or the money landed in a different account than the books say.

Is a balance in Ask My Accountant always a problem?

No. The account exists so a bookkeeper can park a transaction they're unsure how to code and ask about it later. A few items sitting there mid-month is normal use. The problem is a balance that's still there at month end, or one that grows every month, because that means questions are being parked and never answered. Ask for the list of items and a date for clearing them.

Do these checks work if my books are cash basis?

Yes, with one change. On cash-basis books, accounts receivable and accounts payable may not appear on the balance sheet at all, so skip those two lines. Everything else holds. Cash still has to tie to the bank, uncleared items still age, the parking-lot accounts still need to be empty, and round-number entries still need paper. Sales tax payable and payroll liabilities apply too, because those balances come from money you collected or withheld rather than from invoices.

Should I tell my bookkeeper I am running these checks?

Yes, plainly and without drama. Something like: I want the balance sheet, the reconciliation report and the ledger detail each month, and I'll read them. A good bookkeeper is glad to hear it, because it means their work is being read. Pushback on the request itself is information too. You're the owner, and reading your own reports is part of the job.

Talk to a Houston CPA

Nguyen Accounting Group serves Houston, Sugar Land, Katy, Missouri City and Pearland business owners with proactive tax planning, tax resolution and bookkeeping. See how our tax advisory services and bookkeeping and QuickBooks support work, or book a free consultation to see whether we're the right fit.