Discussion:Why Didn't CPA Include Undeposited Funds on 1120S?

Sound like an error on behalf of the CPA? Doesn't sound like good practice to me. I'm going to call her (CPA) on Mon.

I usually include them in the cash figure, assuming that the funds are subsequently deposited within a reasonable time.

So, now the balance sheet in QB is off by 8k vs. the 1120S, Schedule L. Nice.

My software (while no substitute for a tax professional - Hi Kevin) SCREAMS at me if things don't balance. Keep us posted on the outcome.

And it's interesting that you have an S-corp with a fiscal year end. Rather unusual, I believe.

Personally, I "HATE" when I see an accrual Balance sheet on a tax return that is cash basis and then see an M1 item called "acc to cash diff".

Please let usknow.

Specifically, when our cash basis clients inform us that they held up on depositing all checks that came in after November 1 in order to avoid paying tax on the income.

It's almost as good as when they tell us that they left a few checks blank so that they could write checks dated 12/31 after the fact & still have them be in order relating to the January checks they wrote subsequently.

All of this as per what their infamous "previous accountant" had advised them was standard procedure.

What strikes me though as strange - is a June y/e for an S-Corp. There are specific rules on required y/e's for S-Corps so I hope that is not an issue that has not at least been checked on as well.

Smokeytax: The client's receipts are largely generated via credit card sales. So, it can take up to x-amount of days for the monies to be deposited into the biz checking. Hence, the rather material undeposited funds amount. By all means, the undeposited funds amount can climb as high as 20k, at times, contingent on sales.

Michaelstar: Huh, interesting. Something I need to research now that you bring it up. I must admit that this is the only client I've encountered that's a cash-based S corp w/a June y/e.

S-Corp's can a have fiscal y/e if it is a "natural" business year. See Sec 1378. It needs to pass certain tests but it can be done.

S-Corp's can also have a fiscal y/e if its majority shareholders are on the same year. See Rev.Proc. 2002-37 and 2002-38

S-Corp's can have a fiscal y/e under the special election of sec 444 for which SeasideCPA is referring to by pointing out Form 8752 but this can become expensive in that the deposit does not flow through to the s/h's and the deposit is non-interest bearing.

These are all issues I would want to look at and document in my perm file for the client just to satisfy myself if I were preparing the return.

So yes, there are multiple reasons - but still - a fiscal y/e for an S-Corp is out of the ordinary

The way QB handles it makes the money basically 'cash (or checks) on hand'. Just because you haven't gotten to the bank yet doesn't change the fact that it's income.

Sandy's description sounds more like a deposit(s)in transit - but still income.

I'm curious to hear the end of this story.

Because when he looked in the file, he saw that's what he did the last year.

In other words, the prior CPA just kept doing what he had done before. SALY.

Southparkcpa: I just double-checked. It's a fact that the 8k's not on the balance sheet. It wasn't backed out of income or treated as M1, either????

Seaside CPA: I just reviewed Form 8752. Not sure if/when the client files the form. More fact-finding is needed on this point...

Natalie: Well, I specifically mapped the Undeposited Funds account in QB to the B/S-Assets: Cash acct. to make it elementary for tax software.

Michaelstar: Thanks for all the great info. I am reading up on all you cited.

I make it VERY CLEAR to my clients that undeposited funds should always be zero. It is a holding/control account for a transaction(s).

When you receive payments, make the deposit or why bother.

I teach my clients to batch process their reciepts. The balance in the undeposited funds should MATCH the deposit ticket which was added by hand. THEN and only then you make the deposit in QB's, which will agree to the deposit ticket. I hate when a client puts indicidual checks as deposits.

"Show me a client with a balance in their "undeposited funds" and I will show you a client with weak internal controls."

My favorite account on a client's books was the Chinese restaurant's "Cash in Drawer" account. It represented all the sales that hadn't been rung up on the cash register. Where the money went to nobody knows.

P.S. Come to think of it, they probably do smoke cigars in China today. Nothing that gives a rich man more satisfaction than toking on a blast furnace and blowing noxious smoke into the faces of his more financially strapped associates.

That reminds me of my favorite "reconciling item".

I ask the book keeper..... "Is cash reconciled", she says of course.

Then I see large amounts of "Cash on books, not in bank".

I know that every time I have to do a 263 calculation, I have to look up how I did it the prior year.

But perhaps you aren't like that Michael. If so, then I could see why you wouldn't get the joke.

You won't get these either:

or these

or these

I did not opine on this last year so my current opinion is not SALY.

Your statement is based on the assumption that the client has immediate control over when the payment is deposited into the biz checking. This isn't the case for my client who generates the majority of its revenue via CC transactions. Funds from said transactions may take up to several days to be deposited into the biz checking. Hence, the need for Undeposited Funds in QB. It would rarely, if ever, be zero.

Kevin, I did recognize the joke. It just does not belong here.

Southpark, I respectfully disagree with your comment that anyone who has a balance in their undeposited funds account does not have good internal controls. I agree that in most cases it should periodically zero out, however. Sandy L just gave a good example of when it doesn't.

Even though CC payments take some time to clear, that is not a reason to delay posting the deposit and clearing undeposited funds

Although I like Outwests point. In theory.... the undeposited funds account is unique to only QB's and in theory should NOT exist and for us older CPA's we did the job with the account. In fact, the account is really unreconciled/recognized deposits. BUT I see your position clearly.

I do believe that the account should zero out "occasionally".

Excellent point Sandy and Natalie. My sincerest apologies!

One of my clients had an undeposited funds account that didn't clear most of the time. I had to really look at it to see what was happening. They use an outside provider to collect customer payments. The payments were recorded the date the provider received them. The deposits were then made about 10 days later. In addition, they had some funds coming in that they deposited on their own into two different bank accounts. In order to simply this account a little, I recommended the client set up another AR account for the provider payments. That helped a little, but they still have a balance in their account because they make their deposits every two or three days.

As such, I wouldn't dare advise my client to clear the undeposited funds by making a deposit to match the settlement printout when the "in transit" amounts may take up to ten days to actually be deposited into the bank account. Why? Because, this creates a huge A/P issue.

If the funds are accounted for in the check register, however, haven't actually been deposited into the business checking, then I have a client on my hands writing checks and paying bills with funds that aren't available. Critical point, which brings me back to my hardcore stance that undeposited funds is absolutely necessary, at times, in QB.

Still waiting to hear from the CPA on the 8k...

Furthermore, with all the SALY talk--I checked out what the CPA did last year. She did include the undeposited funds amount on Line 1 Cash on the B/S.

Sounds like the prior may have imported the accounts from the accounting software into the tax software, but not had a tax code on the undeposited funds account, resulting in it not getting pull

Sounds like the prior may have imported the accounts from the accounting software into the tax software, but not had a tax code on the undeposited funds account, resulting in it not getting pull

1. Find another service provider that will deposit the funds on a more timely basis. Ten days is way too long. (I know it happens, and I know there are providers who will charge the same or less and deposit more frequently.)

2. Have the client set up a separate AR account as my client did. That way the undeposited funds account should clear on a more regular basis.

I think it's important to know that the undeposited funds account is clearing periodically so you/management can tell there's no funny stuff going on.

I would imagine that if it wasn't backed out of income, then they list AR <even if they are cash basis> on the B/S and the number is included there.

Does the total assets per QB = T/R and the same for liab and equity?

As for Kevin's joke, it was quite funny. As long as I have last years airplane, I can fly this years ship. One of the oldest jokes in the book.

The battle between EA and CPA is a silly one, but we all still need to be able to laugh about jokes. I refuse to walk on eggshells, I much prefer pretty little things walking on my back in high heels instead.

Soooooooooooooooooooooooo, what happened?