Question

You have received a letter from a disgruntled client concerning this year’s tax return that your firm recently completed for his or her company. The client’s business is in the second year of operations, and you remembered that it seemed to be much more profitable this year than during the first year of operations. You also recall that this particular client’s year-end work was assigned to one of your relatively new staff accountants, which might be part of the problem. The gist of the letter is that last year’s taxable net income was about $25,000, and according to the company’s calculations, the net income from this year should have been about $50,000. The client is wondering why the company is showing taxable net income of $75,000 on this year’s return and paying income tax on that amount. You retrieve the file to review it and immediately see the problem.
Your staff accountant failed to make the closing entries at the end of the first year of operations!

Requirement
1. Prepare a letter to this client explaining the situation and, most importantly, explaining the importance of preparing closing entries at the end of each and every year. Also, suggest a solution to this problem for the client, knowing that just explaining the accounting issue might not be enough to retain this client in the future.



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  • CreatedApril 29, 2014
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