Here is a question every business owner should be able to answer: Do the numbers in your accounting records support the numbers reported in your tax returns?
If the answer is “I don’t know,” that is something worth reviewing.
Businesses generate financial information from several sources—books of accounts, invoices, bank records, tax returns, withholding schedules, financial statements, and supporting documents.
These records are interconnected. When they tell different stories, you need to understand why.
A Difference Does Not Automatically Mean an Error
Accounting and tax reporting do not always treat transactions in exactly the same manner or period. Legitimate reconciling items can exist.
So if two figures do not match, the correct response is not immediately: “Someone made a mistake.”
The correct response is: “What caused the difference?”
That difference should then be traced, explained, and documented.
Start With Revenue
Revenue is one of the first areas worth reconciling.
Compare the sales recorded in your books with your underlying sales documents and amounts reported for applicable tax purposes.
If there is a difference, identify its source. Was something recorded in a different period? Was a transaction duplicated? Was an adjustment made? Was a transaction treated differently for accounting and tax purposes?
The explanation matters just as much as the amount.
Then Look at Expenses
Expenses deserve the same attention.
An amount recorded as an expense in the books may require further analysis before determining its tax treatment.
The business should be able to explain what the expense was for, how it relates to operations, and what documentation supports it.
Material expenses with weak or missing documentation should be identified early rather than discovered during year-end review.
Don’t Forget Withholding Taxes
Withholding accounts are another important reconciliation area.
Amounts recorded in the books should be reviewed against applicable withholding tax returns, schedules, certificates, and related transactions.
Unreconciled withholding accounts can remain on the balance sheet for months if nobody investigates them. That is why these accounts should be reviewed periodically rather than only during annual financial statement preparation.
Reconcile the Balance Sheet Too
Reconciliation is not limited to income and expenses.
- Cash and bank balances
- Accounts receivable
- Accounts payable
- Advances
- Taxes payable
- Creditable withholding taxes
- Input and output taxes, where applicable
- Loans
- Fixed assets
- Equity accounts
Large, unusual, negative, dormant, or long-outstanding balances deserve attention.
Again, unusual does not necessarily mean wrong. It means the balance requires explanation.
Why This Matters at Year-End
If monthly accounting is properly maintained, year-end should largely be a process of validation and finalization.
If records have not been reconciled throughout the year, year-end becomes an investigation.
The team may have to trace transactions from several months earlier, locate missing documents, correct classifications, and explain balances when the people involved may no longer remember what happened.
That consumes time and increases risk.
Make Reconciliation Part of Your Routine
Do not wait for an audit, tax assessment, or year-end closing before comparing your records.
A monthly reconciliation process can help management identify problems early and produce more reliable financial information.
Your books, tax returns, financial statements, and supporting schedules do not have to contain identical numbers in every situation.
But where they differ, you should know why. That is the difference between simply maintaining records and actually controlling your accounting and tax compliance.
Need help reconciling your accounting records and tax filings? CBOS Business Solutions Inc. can assist with bookkeeping review, tax reconciliation, and BIR compliance.
Leave a Reply