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Reading the books: statements, methods and reconciliations

SEE 2 Chapter 19 · IRS outline 2D1, 2D2, 2D3, 2D4, 2D6, 2D7, 2D8, 2D9

Theo's first business return felt like a puzzle. His tenth feels like detective work. Copperline's balance sheet doesn't balance, its net income doesn't match the return, and there's a 'loan to shareholder' that has grown for six years. Pine Street Bakery has switched to accrual and no one told Theo. Nadia gives him a yellow pad. 'The numbers always talk to each other,' she says. 'Just listen to them, and they'll tell you where the mistake is.'

In this chapter

1. Business type, codes and year-to-year review
2. The income statement
3. The balance sheet and how it ties
4. Accounting methods and Form 3115
5. Reconciling book to tax: Schedules M-1, M-2 and M-3
6. Pass-through items: reading a K-1
7. Related parties and loans to and from owners

This chapter has 7 lessons and 58 practice MCQs with explanations, plus flashcards and a recall sheet.

What this chapter covers

• Business codes and year-to-year review
• income statement
• balance sheet proof
• cash, accrual and hybrid
• Form 3115
• K-1 review
• Schedules M-1, M-2 and M-3
• related parties and owner loans

Chapter 18: Business assets: basis, sales, exchanges and repairs · Chapter 20: Advising the business taxpayer