Why does the prior balance sheet not match the previously filed return?

There are typically three reasons a prior balance sheet will have changed, and therefore the prior Retained Earnings balance doesn’t match:

  1. We never had access to that balance sheet because we started the bookkeeping after the return was filed. So we built the starting balance sheet based on the bank account balances.
  2. Outstanding checks clearing late: We record all checks when they hit the bank (using the check date, not the cleared date). Since we reconcile January before the previous year is complete, we usually catch all checks written in the prior year. Additionally, we ask the client to look for any checks that may not have cleared by Jan 31. If the client doesn’t let us know, and a previous year check hits the bank after Jan 31, it’s likely it will change the prior year’s balances.
  3. Client editing past year’s transactions. We give the client the ability to edit the work we perform. We ask them not to change any transactions from years where the tax return has already been filed (click here to read those instructions). However, some clients do not heed that advice and will still do so. Since we don’t know when our clients file their taxes, we have no way of controlling this.

If the prior balance sheet has changed since you filed the return, we suggest performing an Adjusting Journal Entry to return the Balance Sheet to where it needs to be, and supplying us with this adjustment so we can book it.

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