Tony Passwater 
Stop Your Profit and Loss Roller Coaster
Understanding and Correcting Month-End Distribution Mistakes
Does your Profit and Loss statement move each month like a roller coaster? One month your profitability looks fantastic, and the very next it is down in the dumps, yet you know your day-to-day business operations have remained completely steady?
This frustrating pattern is almost always caused by not utilizing a structured monthly closing process to identify distribution errors and properly allocate operational expenses to the correct calendar month. In this opening guide of our three-part series, we will look at what causes this financial volatility, how to spot it happening, and how to easily resolve it.
I have written about the extreme importance of “Closing Your Books” each month in many earlier articles. Yet, we still see corporate financials that have not been closed properly to account for expenses that simply should not be included on the current P&L month, as well as expenses that have been omitted. This is one of the primary reasons small business owners often do not trust the financial statements they get from QuickBooks—but they should be able to rely on them completely.
When analyzing your business operations, it is critical to do so on an Accrual Basis. You may elect to file tax returns on a Cash Basis, but to get a true, actionable picture of your business’s financial health, you must use Accrual. QuickBooks will default reports to Accrual Basis, but you can also customize and memorize them to suit your needs.
Accrual Basis analysis allows for expenses to be recognized in the month they actually occurred, and not necessarily when they were paid. This is a key feature of creating a “Bill” in the month the expense was due, rather than when it was paid weeks or months later.
Multiple Payments in the Same Month
One of the most common causes of P&Ls fluctuating from month to month is when payments are made for expenses that represent more than the current month. This usually occurs under two common scenarios:
Payments are made directly to a vendor monthly account without using the “Pay Bills” function.
The physical payment made is for a recurring expense that covers more than a single month.
Not Using the Pay Bills Feature: We often see this when a payment is made for an expense at the very beginning of a month, and another check is issued to the same vendor at the end of the same month. This typically means the first payment was actually for the previous month’s bill, and the second was paid early for the upcoming month—effectively booking two months of expenses in a single month and zero in the next.
The best way to identify these ledger issues is to run a Preliminary P&L report for the last 3 to 4 months and set the “Show Columns” option to “Monthly”.
Figure 1 – Preliminary P&L showing monthly discrepancy for the same expense account
The Internet Fees in this example (Figure 1) show a clear issue in the second month and the fourth month. This warning should prompt you to double-click the totals to drill down and review the transactions. In this case, once reviewed, it was noted that two payments were posted in the second month (one of which was actually for the third month), and one payment in the third month was actually for the fourth month.
Using the QuickBooks “Enter Bills” function stops this completely. The Bill Date when entered places the expense on that specific date, even if you don’t physically pay the bill until months later. Then, executing the “Pay Bills” process generates a “Bill Payment” transaction, which can be paid from any bank account or credit card without skewing your P&L.
Leaving bills unopened or unentered until you plan to write the check is an incorrect bookkeeping process. Our advice is to open all bills daily and enter them as a “Bill” using the exact invoice date. You can also memorize standard recurring bills so they enter automatically. This simple habit keeps your operational expenses completely matched to the correct calendar month.
More Than One Month Expense
Another common culprit is when expenses are paid for services that span multiple months. Again, running your monthly Preliminary P&L report for 3 to 4 months will easily reveal these anomalies.
Figure 2 – P&L Report indicating an expense that spans multiple months
In this example (Figure 2), a massive expense is taken in the first month, with zero additional costs for the three months after. This is a prime indicator that the payment made in the first month was actually for multiple months—a very common occurrence for insurance premiums, annual software licenses, or municipal permits.
In this specific case, the premium paid was actually for six months of coverage. To correct this, the initial premium payment should be distributed directly to an “Other Current Asset” account, specifically: 1630.00 Insurance Pre-Paid Premiums.
Figure 3 – Other Current Asset Accounts for managing Pre-Payments
Next, divide the total premium by the number of months it covers (6 months in this example), and set up a memorized journal entry to distribute that exact portion from your 1630.00 Insurance Pre-Paid Premiums asset account to your 6510.00 Liability Insurance Expense account automatically on the final day of each month.
In Part 2 next month, we will look at what other transactions cause the P&L to become an out-of-control roller coaster—focusing on accruals and inventory adjustments.
Closing Your Books is a High Corporate Priority
Closing your QuickBooks monthly should be a top operational priority for every small business owner. Ideally, you should finalize your monthly reports by no later than the 5th of every following month. While many business owners struggle to hit this target, it can be achieved with the right system integrations and clean bookkeeping habits.
In today’s challenging business climate, understanding your historical benchmarks and expense distribution is a critical skill that must be mastered by owners, managers, and comptrollers alike.
Our team at AEII (QuickBooks R Us) is dedicated to helping small businesses set up their platforms correctly, clean up years of messy data, and train staff to maintain pristine financial records.
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