My bookkeeper is asking for the year-end adjusting journal entries – what are they and do I need them?
We recommend that the company’s accounting records be maintained as the primary source of financial information and that you do NOT attempt to adjust these financial records to match the tax return information. Although they are related, they serve very different purposes. The company’s financial records are intended to track all transactions and provide company management with the ability to manage the business. The tax return information on the other hand is strictly used for tax reporting consistent with tax law and is often very different than the generally accepted accounting principles applied when maintaining the company’s books. And in many cases, complete financial information is not included in the tax return because it is not required by law and is to the taxpayer’s detriment to provide it.
When an outside institution needs financial information, we strongly recommend pointing them to the company’s financial information. In those cases where the institution attempts to use the tax return for financial information purposes, we recommend providing the above explanation. Reputable institutions already understand and embrace this difference and recognize the importance of reporting tax information differently than financial information because of the different objectives for which each is intended.
One area where it may make sense to adjust the company records is regarding asset depreciation. The tax records reflect the depreciation claimed for the year as an expense. The detail for this tax depreciation expense is reflected on a supporting worksheet entitled “Depreciation Detail Listing” and is provided as a support form in the complete tax packet. It is not filed with the return but should be maintained in the tax records and can be used to true up any depreciation recorded on the company’s balance sheet for the year.
If you have a question you would like featured in the FAQ Tax Series, please submit your suggestion to firstname.lastname@example.org.