Oct 2026 · @Cathy
Most business owners cannot tell whether their books are right, and that is not a failure of intelligence. It is that nobody ever showed them what right looks like. Categorized is not the same as correct, and a bank reconciliation can balance every single month for a year while the numbers behind it are quietly wrong. Here is what to look at, including one test you can run yourself in about five minutes.
First, make sure you actually have books
The most common version of bad bookkeeping is not a bad bookkeeper. It is no bookkeeping at all.
A used car dealer we took on this fall had no books. What he had was bank statements, which he handed to his tax preparer once a year, and the preparer worked from what was in front of him and nothing else. On paper the business looked strong, north of $4 million in sales over ten months. His bank account was nearly empty and he could not explain the gap.
The explanation was that most of the money moving through that account was never his. Over $1.7 million of it went straight back out again as financing for the cars. Another $235,000 was sales tax he had collected from customers and owed to the state. Take those out and the business earned around $210,000 over ten months. Real money, and nothing like $4 million.
That gap between sales and profit is the whole point. Four million dollars of sales sounds like a business with room to spend, but almost all of it went straight back out as the cost of the cars. He spent about $78,000 on advertising this year. Against $4 million in sales, that is under two percent, and nobody would look twice at it. Against the $210,000 the business actually earned, it is roughly 37 cents of every dollar of profit.
He also suspected one of his employees was stealing on the company credit cards. We went through every charge on all of them. The cards were clean. Nobody was stealing from him. He simply had no idea what he was spending.
None of this was hidden. It was all sitting in an account he looked at constantly. A bank balance tells you what is there today. It cannot tell you whose money it is.
The one test you can run yourself
If you do only one thing after reading this, do this. It takes about five minutes and requires no accounting knowledge at all.
Ask whoever keeps your books whether the accounts are reconciled. Hopefully they will say yes. Then go in yourself, start the next month's reconciliation, and look at the transactions still sitting there uncleared. Everything in that list should be recent, from the period you are about to work on. If you are seeing items from three months ago, or from last year, something is wrong.
Old uncleared items mean one of three things, and none of them are fine:
You have duplicate transactions on the books
You have charges recorded that never actually happened
You have a deposit nobody can trace back to a sale
A service business we cleaned up this year had been reconciling every month for five months, and every month it balanced. What was actually happening is that deposits were getting recorded twice, once as a sales receipt and again as the bank's own copy arriving through the feed. The duplicate cleared, the sales receipt sat in the register uncleared, and the arithmetic came out right every single month while reported income drifted further above what the business had really made.
Five months of clean reconciliations. Five months of overstated revenue. This is why "the accounts are reconciled" does not answer the question of whether your books are right.
What you should be getting every month
This is the bar I would hold any bookkeeper to. Every month you should receive a profit and loss statement, and it should be broken out well enough that you can see three separate things: what came in, what it cost you to deliver it, and what you spent to keep the doors open.
Sales first. Then cost of goods sold, or cost of sales for a service business, meaning anything you only spent because you made the sale. Then your operating expenses, the costs that happen whether you sell anything that month or not.
That third group is the one that matters most and the one most often dumped into a single useless pile. When your fixed costs are broken out properly, you can finally answer the most important question in your business: what do you have to bring in each month just to pay the bills and keep the lights on, before you have earned a dollar of profit. That is your break-even number. Every owner should know theirs. Most do not.
So if your P&L shows up as a wall of categories you do not recognize, or if half of it lands in miscellaneous and general expenses, that is not a cosmetic complaint. It means the statement you are being handed cannot be used to run the business.
Two things only the balance sheet will tell you
Most owners never open their balance sheet, and plenty of the ones who do are not sure what they are looking at. You should still be looking at it, and if you do not fully understand it, your bookkeeper should be walking you through it. It becomes urgent the moment you own equipment or carry real debt, but there are two things on it you will not find anywhere else.
What you actually owe
If you are carrying balances on more than one credit card, you have probably never seen the total. You add it up in your head, and your head gets it wrong, because the figure you walk around with tends to be the one you can live with rather than the one that exists.
The owner of a laundry service I work with is carrying roughly $30,000 across several credit cards. She knew every card individually. She had never seen them summed in one place, and seeing that number is what got her thinking seriously about restructuring the debt instead of continuing to carry it. That reaction is the whole value of a balance sheet.
What you have been taking out
The balance sheet also shows your draws, the money you have pulled out of the business for yourself. Two things go wrong here and both are worth catching.
The first is that the draws are real and larger than you thought, and you have been quietly taking more out of the business than it can support. The second is that your bookkeeper has been coding things to draws that were legitimate business expenses, which overstates your profit and your tax bill at the same time.
Either way, that only shows up on the balance sheet, and only if somebody points at it.
Automation is fine. Unreviewed automation is not.
I am not against the automation. Bank rules, automatic matching, AI categorization, they all work and I use them. The problem is what they produce when nobody is watching, which is books that look finished.
That is the genuinely hard part for an owner. A categorized transaction looks exactly like a correct one. The screen is tidy either way. If you have never read a financial statement you have no way to tell them apart, and the software will not tell you, because as far as it is concerned the work is done.
Rules can be trusted under two conditions, and both have to hold:
They were set up properly to begin with, by somebody who actually knows the system rather than switched on and left to guess
Somebody reviews the output every month, so a rule that has started catching the wrong things gets caught
The same service business from earlier had a bank rule categorizing payroll withdrawals as an expense. Payroll was already being posted by the payroll system itself, so every run landed on the books twice. The rule did exactly what it had been told to do. Nobody looked at what came out the other end for months.
It is not set it and forget it. Somebody has to look at it.
What to do with this
You do not need to learn accounting to hold your books to a standard. You need to ask for three things and check one.
Ask for a profit and loss statement every month, broken out so you can separate what you sold, what it cost you to deliver it, and what it costs to keep the doors open
Ask for your break-even number, in dollars per month
Ask someone to walk you through your balance sheet, specifically what you owe in total and what you have taken out in draws
Then run the test. Start next month's reconciliation and look for anything sitting uncleared that is older than the cutoff date.
If your bookkeeper hands you those three things and the reconciliation comes back clean, they are doing the job. If the answer to any of them is that the reports are not really set up that way, you have your answer there too.
The owners who get hurt by this are almost never the ones who got bad advice. They are the ones who never had anything in front of them to question in the first place.