You received a letter from a disgruntled client concerning this year’s tax return that you just 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 a relatively new staff accountant, 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. And so 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. The staff accountant failed to make the closing entries at the end of the first year of operations!
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