Reading a New Client's Books

Learn It

Do not start fixing unfamiliar books until you understand what you are looking at. This is the most important rule when you inherit a new client. If you start changing balances before you understand the business, you can create more problems than you solve.

Step 1: Understand the Business

Before you look at a single number, learn about the business:

• • What does the business do? What industry is it in?
• • What entity type is it — sole proprietor, LLC, S corporation, partnership?
• • How does the business earn money? Products? Services? Both?
• • Does it have employees? Payroll?
• • Does it collect sales tax?
• • Does it have loans or debt?

This context tells you what to expect in the books. A retail store should have inventory and cost of goods sold. A service business probably should not. If you see inventory accounts in a consulting business, that is a clue worth investigating.

Step 2: Review the Chart of Accounts

The chart of accounts tells you how the books are organized. Are the accounts reasonable for this type of business? Are there too many accounts? Too few? Are there duplicate accounts? Is everything categorized into the right type — asset, liability, equity, income, or expense?

Step 3: Review the Balance Sheet

The Balance Sheet shows what the business owns and owes. Look for:

• • All bank accounts — are they all listed?
• • Credit cards — are they listed as liabilities?
• • Accounts Receivable — is the balance positive? Negative A/R is a red flag.
• • Accounts Payable — is the balance positive? Negative A/P is a red flag.
• • Loans — do the balances look reasonable? Have they changed?
• • Equity — does it look reasonable for the entity type?
• • Clearing accounts — are they near zero, or are they growing?
• • Fixed assets — are they listed? Is depreciation being recorded?

Step 4: Review the Profit & Loss

The Profit & Loss shows revenue and expenses over time. Look for:

• • Does revenue look reasonable for this type of business?
• • Are there unusually high or negative expense accounts?
• • Compare periods — did anything change dramatically?
• • Are there accounts that should not exist for this business?

Step 5: Check Reconciliation Status

Are the bank accounts and credit cards reconciled? When was the last reconciliation? An account that has not been reconciled in months is a sign that the books may not be reliable. See Bank Reconciliation and Credit Card Reconciliation.

Step 6: Identify Unusual Balances

As you scan the Balance Sheet and P&L, note anything that looks unusual. This is similar to diagnosing books from financial statements — a strange balance is a clue, not a diagnosis. You are not fixing yet. You are building a list of things to investigate.

Step 7: Build a Review Plan

After your scan, organize what you found into a plan. For each area that needs attention, note:

• • What you noticed
• • What you would review next
• • What information you need from the client
• • How urgent it is

Then prioritize. Unreconciled bank accounts, negative A/R, and growing clearing accounts are usually high priority. A slightly high meals expense may be worth reviewing but less urgent. This is the same investigative approach used in cleanup bookkeeping — understand before you fix.

See It

Let's introduce a new practice business and walk through how an experienced bookkeeper would approach its books for the first time.

An experienced bookkeeper opens the books and thinks:

Notice what the bookkeeper did not do. They did not immediately write off the negative A/R. They did not move the Undeposited Funds balance. They did not change the loan balance. They built a plan first. Understanding comes before fixing.

Do It

You are reviewing Harborline Services' books for the first time. For each area, note what you noticed, what you would review next, what information you need, and set a priority.

Prove It

Answer each question, then read the explanation. There's no score — this is just to help the ideas stick.

Ready for a Complete Client?

A lesson can show you what to review. A practice client makes you decide what matters. Complete QBO Dojo practice clients give you unfamiliar books and business activity where the work is not broken into labeled lessons. You have to find the problems, prioritize them, and work through them yourself — just like real bookkeeping.

Key Takeaways