Owners read the profit and loss report. It answers the question they care about, and when the bottom line looks plausible, the books feel right. The balance sheet gets a glance at most.
That is the wrong way round for anyone trying to judge whether the books are accurate. In double-entry bookkeeping every transaction touches two accounts, so an error in income or expenses always leaves a matching error somewhere on the balance sheet. Income counted twice shows up as money that was never deposited. An expense recorded twice shows up as a credit card balance that does not match the statement. The profit and loss report hides these. The balance sheet cannot.
The ten checks below take about an hour the first time. The account names are the ones QuickBooks Online uses, since that is what most small businesses run, but the logic holds in any system.
| Assets | |
|---|---|
| Checking | 14,280.11 |
| Payments to deposit Should be near zero | 18,400.00 |
| Accounts receivable Cannot be negative | −2,150.00 |
| Truck | 32,000.00 |
| Liabilities | |
| Credit card | 3,912.40 |
| Sales tax payable More than a year’s worth | 9,870.00 |
| Payroll liabilities | 1,244.75 |
| Truck loan Same as last December | 28,000.00 |
| Equity | |
| Opening balance equity Should be zero | 6,215.00 |
| Owner’s draw | −24,000.00 |
| Retained earnings and net income | 37,287.96 |
Assets 62,530.11 = liabilities 43,027.15 + equity 19,502.96. It balances, and five lines are still wrong.
Before you start: scan for wrong-way balances
Each kind of account has a side it normally sits on. Assets and expenses grow with debits; “liabilities, equity… and revenues increase with a credit.”1 On a balance sheet, that means assets and liabilities should both appear as positive numbers. A negative bank balance (unless you are truly overdrawn), negative inventory, negative receivables, or a negative loan is, in the textbook’s phrase, “an abnormal balance,” and each one has a specific cause. Circle them first. Several of the checks below will explain them.
Cash and cards
1. Bank balances equal the reconciled statements
Look at: the balance sheet as of your last statement date, beside the statement.
Healthy: the two agree once you allow for items still in transit, such as a check written but not yet cashed. As Intuit puts it, after reconciling, “your QuickBooks ending balance and account statement should be the same.”2
If it’s off: look at what is still uncleared. Items from months ago are rarely in transit. They are usually duplicates, or entries for things that never happened. Then look for an account called Reconciliation Discrepancies. It appears only when someone forced a reconciliation to finish, and a forced adjustment “creates an expense transaction if the difference is negative, or an income transaction if the difference is positive.”3 In other words, an unexplained difference was turned into profit or loss. Intuit calls this “a last resort.”
2. Credit card balances match, and payments are not expenses
Look at: each card’s balance against its statement.
Healthy: they agree, and the balance is never negative.
If it’s off: the usual cause is recording the monthly payment to the card company as an expense. The purchases on the card are the expenses. The payment only moves money from the bank to reduce what you owe, which is why QuickBooks records it through a separate “pay down credit card” step.4 Books that expense both the purchases and the payment count every card purchase twice.
3. “Payments to deposit” is empty
Look at: the account QuickBooks calls Undeposited Funds or Payments to deposit. It “acts as a temporary lockbox” for customer payments “until you record a formal bank deposit.”5
Healthy: only what you received in the last few days and have not yet banked.
If it’s off: a large or growing balance nearly always means income has been counted twice. A customer’s payment was recorded against the invoice, which put it in the lockbox. Then the bank deposit arrived in the feed and was added as new income instead of being matched to that payment. The fix Intuit describes is to “undo the added deposit… and match it to the payment.”6 In the example above, $18,400 of sales has probably been counted as income twice.
What you are owed, and what you owe
4. Receivables and payables are real
Look at: the accounts receivable and accounts payable aging reports beside the balance sheet.
Healthy: each aging total equals its balance sheet line, every invoice on the list is one you actually expect to collect, and nothing is negative.
If it’s off: a negative balance or an old open item usually means a payment was recorded but never applied to its invoice or bill. On reports run on the cash basis this surfaces as an account named Unapplied Cash Payment Income, created when a payment is recorded “without applying it to a sales form.”7 The repair is to open each payment and apply it.8 Invoices that will never be paid should be written off rather than left to flatter the total.
5. Loans match the lender
Look at: each loan balance beside the lender’s latest statement.
Healthy: the same principal balance, falling a little each month.
If it’s off: every loan payment has two parts. The principal part “reduces the amount that the borrower owes the lender”; the rest is interest, which is an expense.9 A loan balance that has not moved all year means whole payments are being expensed, which overstates expenses by the principal. A balance falling by the full payment each month means the interest is never being expensed, which understates them.
| Interest An expense on the profit and loss report | 128.33 |
|---|---|
| Principal Reduces the loan on the balance sheet | 511.67 |
| Payment leaving the bank | 640.00 |
6. Sales tax payable equals your next return
Look at: the sales tax payable balance beside the amount on the return you are about to file.
Healthy: they are the same, and the balance drops to near zero each time you pay.
If it’s off: a balance that only ever grows means the payments to the state are being recorded as an expense instead of against the liability; Intuit’s instruction is to “record your payments in QuickBooks to zero out your sales tax payable.”10 A balance of zero in a business that charges sales tax means the tax is being recorded as sales. The IRS is clear that tax you collect for the state from buyers is “not income.”11
7. Payroll liabilities equal your next deposit
Look at: payroll liabilities beside what your payroll reports say is withheld and not yet paid over.
Healthy: they agree, and the balance clears with each deposit.
If it’s off: first rule out a recording error, where deposits were posted as an expense. If the balance is real, treat it as the most urgent number on the page. This is money withheld from employees, held in trust, and the IRS’s penalty for failing to pay it over “is 100% of the unpaid trust fund tax,” assessed personally.12
Leftovers
8. Opening Balance Equity is zero
Look at: an equity account named Opening Balance Equity.
Healthy: zero, or absent.
If it’s off: this account is the other side of every starting balance typed in when an account was first set up. It is scaffolding. Intuit’s guidance is that it “shouldn’t have a remaining balance” and that any leftover “should go to other equity accounts or retained earnings.”13 A balance here means the setup was never finished, and sometimes that a starting balance was entered that also arrived through the bank feed.
9. Nothing is parked in “uncategorized”
Look at: Uncategorized Income, Uncategorized Expense, Uncategorized Asset, and any account someone created with a name like “Ask my accountant” or “Suspense.”
Healthy: zero at the end of every month.
If it’s off: these hold money “that still needs to be categorized.”7 They are honest placeholders, and useful ones during the month. Left alone, they are income and expenses that the reports are not showing where they belong, and by the time anyone asks, nobody remembers what they were.
The owner’s side
10. Equity tells the right story
Look at: the equity section, and the profit and loss report for anything personal.
Healthy: money the owner took out appears in equity, not in expenses, and any loan between the owner and the business has paperwork behind it.
If it’s off: three patterns are worth knowing.
- Personal spending in expenses. “Personal, living, and family expenses” are on the IRS’s list of what a business cannot deduct.11 In the books of a sole proprietor or partnership, money taken out for personal use is a draw, an equity transaction.1
- S corporation owners paid only in distributions. Payments to a shareholder who works in the business “must be treated as wages to the extent the amounts are reasonable compensation for services rendered.”14 An equity section showing large distributions beside a payroll report showing no officer wages is exactly the case that rule is aimed at.
- A shareholder loan that only grows. Loans to and from shareholders have their own lines on the corporate balance sheet, and the IRS expects them to agree with what is reported to each owner.14 An account that is really a running tab of personal withdrawals should be called what it is.
While you are in this part of the report, check the equipment as well. A purchase meant to last for years belongs on the balance sheet, with its cost spread over its life,9 and QuickBooks “doesn’t automatically depreciate fixed assets.”15 If the truck is still carried at full cost three years on, the depreciation your tax preparer calculated was never brought back into the books. Smaller purchases are simpler: a business without what the rules call an applicable financial statement, which describes most small businesses, may use a safe harbor to deduct items costing “up to $2,500 per item or invoice,” by making an election on its return.16
Why this is not only housekeeping
For many businesses the balance sheet is not a private document. S corporations and partnerships report it on Schedule L of their tax returns, and the instructions say it “should agree with the corporation’s books and records.”14 Only the smaller ones are excused:
| Return | Schedule L is not required when |
|---|---|
| S corporation Form 1120-S | Total receipts and total assets are each under $250,000 |
| Partnership Form 1065 | Receipts are under $250,000, assets are under $1 million, Schedules K-1 are filed and furnished on time, and no Schedule M-3 is required |
| Sole proprietor Schedule C | Never required; the form has no balance sheet |
A lender asking for financial statements will read the balance sheet first, for the same reason a bookkeeper does. It is the report that is hardest to make look right when the work behind it is not.
The ten checks on one page
| Account | Compare with | Healthy |
|---|---|---|
| Bank accounts | Bank statement | Equal, nothing old uncleared |
| Credit cards | Card statement | Equal, never negative |
| Payments to deposit | Cash in hand | Near zero |
| Receivables, payables | Aging reports | Equal, no negatives |
| Loans | Lender statement | Equal, falling |
| Sales tax payable | Next return | Equal |
| Payroll liabilities | Payroll reports | Equal, clears each deposit |
| Opening balance equity | Nothing | Zero |
| Uncategorized accounts | Nothing | Zero |
| Equity and equipment | Tax return, loan papers | No personal items; depreciation booked |
Once the books pass, closing them protects the result. QuickBooks can lock a period so that entries before a chosen date cannot be changed without a warning or a password,17 which stops a reconciled month from quietly coming undone.
If several of these checks fail, that is not a reason for alarm. It is what a set of books looks like before a clean-up, and each failure points to a specific, fixable cause. The order to fix them in is the order above: cash first, because everything else is measured against it.
Sources
- OpenStax, Principles of Accounting, Volume 1: Financial Accounting (Rice University, 2019), section 3.1 on normal balances and section 2.2 on owner capital and drawing.
- Intuit, Learn the reconcile workflow in QuickBooks Online. Updated August 24, 2026.
- Intuit, Enter an adjusting entry for a reconciliation in QuickBooks Online. Updated August 5, 2026.
- Intuit, Record your payments to credit cards in QuickBooks Online. Updated August 5, 2026.
- Intuit, Managing your Undeposited Funds account. Updated August 3, 2026.
- Intuit, Fix duplicate transactions in QuickBooks Online Desktop bank feeds (the title as Intuit gives it).
- Intuit, Manage default and special accounts in your QuickBooks Online chart of accounts. Updated August 3, 2026.
- Intuit, Resolve accounts receivable or accounts payable balances on a cash basis balance sheet in QuickBooks Online. Updated August 5, 2026.
- OpenStax, Principles of Accounting, Volume 1, section 13.1 on loan payments and section 11.2 on capitalized costs.
- Intuit, File your sales tax return and record sales tax payments in QuickBooks Online. Updated September 15, 2026.
- Internal Revenue Service, Publication 334, Tax Guide for Small Business, 2025 edition.
- Internal Revenue Service, Publication 15 (2026), Employer’s Tax Guide.
- Intuit, Enter opening balances for accounts in QuickBooks Desktop, updated August 5, 2026. The equivalent QuickBooks Online article describes the account but does not state the rule as plainly.
- Internal Revenue Service, Instructions for Form 1120-S (2025); Form 1120-S and Form 1065 (2025); S corporation compensation and medical insurance issues, page last reviewed March 3, 2026.
- Intuit, Depreciate assets in QuickBooks Online. Updated August 4, 2026.
- Internal Revenue Service, Tangible property final regulations. Page last reviewed August 4, 2026.
- Intuit, Lock your books in QuickBooks Online. Updated September 15, 2026.