QuickBooks Desktop to Online Conversions (Part 2)

QuickBooks Desktop to Online Conversions (Part 2)

Warning: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding!

Hector Garcia: Welcome to the unofficial QuickBooks accountants podcast. I am joined by my good friend Alicia Katz Pollock, the original, the one and only Qbo Rockstar CEO and founder of Royal White Solutions.

Alicia Katz Pollock: And I have the privilege of collaborating with Hector Garcia, CPA, the founder of Right Tool for QuickBooks.

Hector Garcia: In this episode of the unofficial QuickBooks accountants podcast, [00:00:30] we're going to talk about converting from QuickBooks desktop to QuickBooks online Part two. On the last episode, we talked about what doesn't convert, what sort of landmines to watch out for prior to converting, to make sure that your psychologically and technically prepared for the conversion process, especially if you need to have a conversation with your client about, hey, what you're going to lose in the process. Not just the conversion process, but what are you going to lose in terms of [00:01:00] functionality? Now, Alicia and I are going to do the a deep dive into, okay, what is that conversion process look like, what to watch out during the process. And we're following just like last episode, we're following Alicia's SOP standard operating procedures that she uses in her firm to do desktop to online conversions. So first of all, hi Alicia, how are you? And thank you very much for sharing the SOP with us.

Alicia Katz Pollock: Absolutely glad to be here as always. You know, this whole document [00:01:30] is a labor of love, and originally it was just supposed to be a step one, step two, step three. But then I started putting all my notes on it. Of all the considerations that I came across in all the different files in this document has just grown and grown and grown to three and a half pages of single spaced, step by step and every consideration I can come up with.

Hector Garcia: Yeah, there's so, so many little nuances. On last episode, we were actually going down the list and we missed one little tiny detail, which [00:02:00] is the concept of the audit trail. Right? So when you convert from QuickBooks desktop to QuickBooks online, all the transactions in terms of the creation date. Are actually the date that you convert it. So if you have a transaction from last year and you know exactly who was the user who entered it and when they entered it, you don't get that information anymore because it's all being entered by the system. There's a system user and today's date. So you do lose your audit trail. So if you [00:02:30] are thinking that you converted from desktop to online, and then an agent from the IRS or state says, hey, I want to look at the audit trail, they're not really going to see anything beyond that. It was created the day that you converted. So that's a really important point. We didn't mention it last time. But with that being said, let's go through the prep process in your document. So the very first point here you have, Alicia, is in terms of file size and QuickBooks doesn't have, um, doesn't use file size per se. It uses something [00:03:00] else called targets. So what is what is a target and what is the limit in terms of target size that a QuickBooks desktop file can be converted through the conversion process.

Alicia Katz Pollock: So targets are the elements of a transaction. There's a source and a target, meaning the transaction came from one account and went into another account like it came from the check register and went into the meals expense account. So that's two targets right [00:03:30] there. And that means that every transaction has a minimum of two. And depending on how many line items it could have, dozens. If you have a really complex estimate or a complex payroll journal entry or something like that. Now with a qbo conversion, the current guideline right now is that the file has to be under 7000 750,000 targets, and that changes. [00:04:00] I mean, when we started doing this, Hector and I, it was something like 350,000 targets. So they realized that they have to make it available to larger file sizes. And maybe someday this will go up again. So at the moment, as of this date of recording your files, your file size has to be 7500 targets. Now, the way that you find that is in your QuickBooks desktop, by pressing the F2 key and it pops up a little information pane. And [00:04:30] on the left hand column about the middle is where you'll find that target number.

Hector Garcia: And, um, if your file that you're working on right now, it's over 750 targets. 750,000 targets. Sorry. Um, are you screwed? What are their options? Uh, for what you can do moving forward.

Alicia Katz Pollock: That's where you have to start deciding whether you are going to import or whether you are going to start from scratch. But there is one thing that you can do, and that is use the [00:05:00] condense utility that's up under the under file and then utilities and then condense. And what condense does is you pick a date before which you're willing to scrap all of the individual transaction data and just create summary transactions. And that can be really handy if you've been using the same desktop file for ten years. Do you really need all ten years of data? You know, after listening to last week's episode, you've determined, yes, [00:05:30] I do want to convert this data and not start over. So that's when you say, okay, well, what's a reasonable starting point? Is it three years? Is it five years? Is it seven years? What's the minimum amount of data that I need in order to move forward.

Hector Garcia: And what you do a condense it does ask you for some questions, some there's some variability in terms of as a user how you want that condense to go. And your notes say choose choose a shorter date range. [00:06:00] If the date range that you chose wasn't enough to get you under 250,000 targets, and you also say remove unnecessary transactions, remove audit trail and remove unused accounts. What is that?

Alicia Katz Pollock: So those are three different things. I would actually kind of need to see it to tell you exactly what everything is. I don't have it up in front of me, but one is removing the audit history completely. One is actually taking a look at the chart of accounts [00:06:30] and your other lists, like your vendors list and your customer list. And if there are no transactions under them, it will skip them. Now, just as an aside, oh my god, I would love that feature in Qbo to be able to take a look at a chart of accounts, and if an account has never been used to not have to drill in and look to see if it does or not, to be able to just be able to scrap them all would just be glorious.

Hector Garcia: Yeah. So the unnecessary transactions, from what I understand, is [00:07:00] after you do a conversion from a certain date, not a conversion, sorry, a condensed from a certain date, there are some transactions that do not affect your financial statements from that date range on. So if there's transactions from previous periods that are sitting there for whatever reason, QuickBooks couldn't figure out how to delete it. But it was sitting there from from a previous period, uh, things like, uh, an open purchase order, an open sales order, which is all useful stuff, uh, operationally. But if it doesn't affect your financial statements, [00:07:30] basically you're asking QuickBooks to get rid of it during the condense, and all that stuff is going to reduce the amount of potential transactions that QuickBooks needs to transfer over, which is going to reduce the number of targets. Now, uh, cutting the audit history, the audit trail during the condensed process that was added a couple of years ago. And it's really, really good to reduce the file size and improve the performance of QuickBooks desktop overall. But technically that that particular piece will not reduce the number [00:08:00] of targets, because the audit history doesn't increase the number of targets, because the audit history doesn't come with, um, with with with QuickBooks online. But I still recommend doing it, especially if you do not plan to use that condensed file as a, you know, audit file if you're using it just for the purposes of converting to QuickBooks online. If the conversion fails, you might need to go back and do some other tweaking to the file. You want the file to work, uh, fast, right? So so you can go back and try this condensed process [00:08:30] a couple of times.

Alicia Katz Pollock: Yeah, absolutely.

Hector Garcia: Now, the next bullet point here is you need to work on single user mode, and it says if the file is on a server, move it for to the local C drive. So what do you mean by that?

Alicia Katz Pollock: If you are in a multi-user environment and you have the files stored up on a server so that multiple people can get to it, you actually have to be back in [00:09:00] a solo mode. So the first thing that you need to do is kick everybody out, put them in single user mode, but you also need to go to the location on your server where the file is, and either pick it up and move it to your C drive, or maybe you just leave it in place and make a copy of it and put that on your C drive, on your desktop or in your documents folder, and then use that as the source of the conversion.

Hector Garcia: And it is recommended anytime you copy a file or move it from from [00:09:30] one hard drive to another. And like Alicia said, I would copy it wouldn't. Don't move the original file, make a duplicate, copy it to run a rebuild. So it sort of like refreshes and diffracts the file, and the rebuild creates another backup for you, which is which is great. So it's a good, uh, step there that you added to your SOP. Then you talk about running. Yeah. Go ahead.

Alicia Katz Pollock: Yeah. I'm actually looking at my list, and I'm actually now thinking that I want to change the order of these, that I would move the make the copy and [00:10:00] put it on my C drive first and then condense that instead of condensing the company file.

Hector Garcia: Yeah. That's that's yeah, that's that's a good point. I don't think that, uh, the order of, of ESOP implied that you would be making the, the, the condensing first. But I think it does make a good point is, you know, work on the C drive, which might not be optimal for your network setup, but for the for this specific exercise for condensing, rebuilding, uh, sort [00:10:30] of cleaning up in single user mode prior to the qbo conversion, that's probably the best idea. Just move it to the drive that's going to ultimately going to be where you're going to be copying the file from. So then you talk about running the comparison reports. These are the reports that you're going to use as a basis to evaluate the accuracy or how well that conversion went through. So you have a PNL balance sheet. You specifically say it needs to be all dates and it [00:11:00] needs to be accrual basis. So can you give us some reasoning on that?

Alicia Katz Pollock: Sure. When you run the the first thing that you want to do when you after you finish a conversion is make sure you actually had a good conversion. And the easiest way of doing that is comparing the balance sheet and the profit and loss report, because you sure don't want to go through a general ledger report of every single transaction. So these work is really good summaries. So what you do is you run the balance sheet and the PNL for all dates and do it on an accrual basis, [00:11:30] whether or not you're filing taxes on a cash basis. But accrual basis is going to include absolutely everything in its original period in its original location. And then you go through step by step by step. Now we're actually going to get a little ahead of ourselves because this is the last step of the conversion, and we're still just in the beginning of it. But I run these reports in the beginning so that I have the PDFs at, at the get go before I start [00:12:00] doing all of the conversion. So we'll talk about that comparison at the very end. Of all of this topic.

Hector Garcia: And the one thing I want to add is you do want to run the old date report for the PNL on the balance sheet. And ultimately, what you want to do is you want to compare your QuickBooks online. The same report accrual all dates PNL balance sheet, but when it doesn't match. The challenge you will have if you just have all dates is [00:12:30] that if the error or the delta on whatever the conversion process was of your PNL and balance sheet post conversion, it's happening on like 4 or 5 years ago, and it's really not material or important to you. Or maybe it's happening only on the current period, which you haven't even done a tax return for that may that may matter. So one thing I would add to this is I would look at like, which is the last tax return you filed, let's say it was 2022. Then [00:13:00] run the balance sheet for 1231 2022 and compare that as well. Because if for whatever reason, your old dates doesn't match, but your 12, 31, 20, 22 matches and you're sort of, you know, you know what, as long as my tax return ties and then moving forward, I can, you know, deal with all the whatever changes they are, you're probably going to be in a better situation than trying to find, you know, all where was the margin of error or the delta post conversion. So even though [00:13:30] even what QuickBooks recommends officially is check both your old dates. But again, you know what may matter the most to you is just one specific time period. Now let's get into the reasons I don't want to get into deep side. Question this because we could probably make a whole episode about this, but it needs to be in accrual basis, not cash basis. Okay. And and there's a specific technical reason for that. So do we want to explain that to our to our listeners. Why is it why does it need to be accrual. Mhm. [00:14:00]

Alicia Katz Pollock: Yeah. So accrual basis is really important in this in particular because of accounts payable and accounts receivable that even cash based businesses still run invoices so that their customers can pay them. They may not they may or may not run bills. But you need to have the open invoices. And that's something that we're going to do comparisons or talk about in setting up new files down the line in either in future episodes. But. Having that information as part [00:14:30] of the conversion is really important. And do you have anything to add? Why else would you want to have accrual as your reporting basis?

Hector Garcia: Well, the main underlying reason is because QuickBooks online has these special Unapplied cash payments, income account and Unapplied, uh, bill payment payment expense accounts. And essentially what QuickBooks does is if you make if you if you receive a payment against [00:15:00] a customer, but not necessarily a specific invoice, you just receive the payment willy nilly. Unapplied. When you do a cash basis PNL, it shows that as income in QuickBooks desktop, that's never happened. Instead, QuickBooks desktop created a negative accounts receivable. Same thing with accounts payable. So QuickBooks online changed the mechanics on how AR and AP is handled in unapplied payments on cash basis. [00:15:30] So what that means is that it's highly likely that because the files could contain unapplied payments as a normal thing and normal thing in the operating process, you can have an unapplied payment that you're going to apply later on. That's going to have a you're going to have a delta on a on a cash basis report. So the accrual report is the only one that both desktop and and online are built or engineered to produce the same type of report.

Alicia Katz Pollock: Just as an aside, if you are looking [00:16:00] at any of your reports on a daily basis and you do see unapplied cash payment income or bill payment Unapplied bill payment, the fix on it is simply take a look at your invoice dates and your payment dates or your bill dates and your payment dates, and it's a guarantee that it's there because the invoice date is after the payment date. And in some cases, like Hector was saying, that's appropriate because you took a payment as a prepayment against a future invoice with negative AR, but sometimes it's just data [00:16:30] error. Somebody put in the date that they actually entered the transaction, not the date that it actually happened. And so you'll see those. And that's the easy fix is I just take a look at the invoice date, and I edit it so that it matches the bill date. And that cleans it up okay.

Hector Garcia: All right. So at this point we already did all the prep work right. We're ready to do the conversion in QuickBooks desktop. And we do need to preface this. You need to have a windows machine in your computer. Or [00:17:00] you need to have a computer that's a windows machine or a virtual windows machine in your Mac, or remote access to a windows various computer that's running QuickBooks Pro, QuickBooks Premier, QuickBooks Enterprise Now in this windows version of QuickBooks desktop, if you go into the company menu, the very last option should say Export Company File to QuickBooks online. That's only in Pro Premier and Accountant. Quickbooks enterprise [00:17:30] actually does not have a simple, easy click here here, here. Pathway to convert to QuickBooks online. There's actually a little bit of a trick. It's a keyboard shortcut. What you need to do is you need to get into the F2 screen, which also works with control one. And by the way, that's important for you to know, because if you're working with Remote Desktop, sometimes the F keys don't work. So you have to use control one instead of F2 to open up the product information page. So if you're in QuickBooks enterprise, [00:18:00] you hit control one or F2. It goes into the product information page, same page that shows you the number of targets. And then inside that screen you hit control BQ. So imagine QB being flipped. So control BQ and then you press okay. And then the export to QuickBooks online window pops up. So it's the same window that pops up. If you were to go to company export QuickBooks desktop to QuickBooks online.

Hector Garcia: But if you don't see that, then you got [00:18:30] to go into the F2 screen and control BQ to get into that screen. Now, when you're in that screen, you're going to have two options. One is to create the QuickBooks online free trial straight from this page. Or and this this part confuses people a little bit. Or you could have created the account separately. And this matters because if you're going through a reseller, for example, you want to make sure that you create it through the resellers link. Um, especially [00:19:00] if there's a discount tied to that. Um, or maybe you've created a, an account from your QuickBooks Online accountant account and you're paying in behalf of your customer. So if the account is being created through a different mechanism, you have to be very careful not to create the file from this screen in QuickBooks desktop. That's going to give you the conversion process. So you make sure you don't click on, you know, get 30 day free trial or create new account. Make sure you don't click that [00:19:30] and you look for something that says log in or use existing account or select current file. And this box kind of changes a little bit in terms of terminology. You'll say something like, you know, do you need to create a new file and you say yes or no, you know, so you have to be very careful with the terminology and then pick something like, uh, yes, I already have a file. Yes. Sign me in. Yes, I already have an existing login. Uh, that, that sort of thing. So you got to make sure that you do click on the option that [00:20:00] makes sense to you at the moment, if you're just creating a file, you know, from the desktop process, which I doubt because most of.

Hector Garcia: People listening to this are accounting professionals, so they're either selling people the QuickBooks, you know, through a reseller or something like that, or they're creating it in the QuickBooks Online Accountant portal. So most accounting professionals are not going to be creating a file from this screen. Okay. So then you're going to click on yes, sign me up. And then you're going to have to log in into the existing [00:20:30] account. And this is the part where it could also get a little bit tricky because when you log in, um, especially if you're an accountant, you're going to see a whole bunch of files sitting there in your accountant, uh, log in and then maybe you have to scroll all the way down to find the specific file that, that, uh, that, that you have or because you've maybe never logged in through QuickBooks online via this specific computer, you might not have, like, sort of like the cookies, uh, set [00:21:00] up, you know, where it just recognize your login. So you may have to go through the whole, uh, you know, dual factor authentication. So I see a lot of people sort of trip up when they're trying to get existing login into an existing account, and they end up giving up and create a new account, and then they go back and go, wait, you know, why do I have duplicate accounts? Alicia, what kind of experience have you had in this area?

Alicia Katz Pollock: Yeah, one of the things that I actually do is I always create it first, whether it's through my wholesale program [00:21:30] or through a reseller, so that we have a file that's up and running, and I usually will log into it and add the business owner user first even before we do the migration. Then when I'm doing the migration and you get to the step where it asks, who do you want to log? You know what, what's the log in for the file? I actually usually use the business owner's login, and that is just one extra step for me to make sure that I'm not accidentally [00:22:00] applying the file to another one in my account, because I have a lot of different logins and a lot of different domains, and it's just much more streamlined to be able to go to the one email address that they have. And my business owners really like the fact. For some of them, this isn't their first qbo file, and I encourage them to use the same email address for both of them. I mean, if it's a separate company, that's a completely separate company. We'll do two different logins for the two of them, and I'll teach them to open them up in [00:22:30] two different windows, like an incognito window or multiple chrome profiles. But most of the time they prefer to be able to use the same email address that is their existing QuickBooks desktop user account, and if they have any other qbo accounts. And then that way it's all again in one domain, and they can easily toggle back and forth between their files, right?

Hector Garcia: One thing worth mentioning is if you once you log in, if you see multiple files [00:23:00] in there, if you click on any of the current company files that are there and the files less than 60 days old, QuickBooks will actually overwrite whatever's in that file with what you have done. Post-conversion. So if you pick the wrong one, you could completely get rid of the data that's in there. And if you pick on the right one and you had, for whatever reason, created a file and maybe started working on the chart of accounts or something like that, and then did the conversion, just keep in mind that this is [00:23:30] deleting everything that you have done, like basically clean slate. Okay. So just keep keep that in mind because that, that part people um, forget about um, uh, often. Okay. And then and then you just go through the motions, you click on all you know. Yes. Continue. Yes. Continue. Uh, the only, um, kind of weird question you might have in the in the process is it will ask you if there's an inventory and we talked about in part one, but if there is their inventory what's the inventory [00:24:00] conversion uh, date for Fifo. And then you do have to pick that. And then and then it goes to the process. And in my experience, this takes really, um, what, uh, an hour for the most part, even even the biggest files. I mean, it's so quick nowadays.

Alicia Katz Pollock: Yeah, sometimes it's only just a few minutes. I'm generally finding that it's taking longer now than it used to. And I think that's because there's so many more things that do convert now than what did convert. So you want to give yourself a window [00:24:30] of a comfort zone of at least 20 to 40 minutes. And when the conversion is done, you're going to be really tempted all along the way to log in and check and log in and check and log in and check. And it used to let you log in and there wouldn't be anything there. Now it doesn't even let you log in while it's in the converting process. So you can sit there and keep clicking if you want to. Or just keep an eye out on your email because they will send you an email when the conversion is done.

Hector Garcia: Exactly. And I do, I do see in your notes some [00:25:00] things it'll be very difficult to explain because that's more graphical than than verbal. But there's a special link that you can go and you can upload your QuickBooks desktop file to insert, which is an entirely different experience than actually logging into QuickBooks desktop and going through this process. So we'll put a link to that in the in in the show notes. My question to you, because I have never used that that link, Alicia, have you actually gone through a conversion with that link?

Alicia Katz Pollock: I've actually used [00:25:30] that link more often than not these days, because I know for a fact I'm going to get them the smoothest experience. So if you go into Qubo's help files, they'll actually point you to it. And what it is is an emulator of a desktop machine, and you just drop your file into the emulator and it'll ask you for the login and boom, it just does it for you. And I, you know, I don't know if I'm assuming and that's going to get me into trouble, but I would like to think that this would always be the latest and greatest [00:26:00] conversion technology. And so I use it all the time. Um, and I've had a really smooth process with it. I think the interface is a little tricky, like knowing what to click on. It's definitely more technical, but it gives me a sense of security to use it that way, for sure.

Hector Garcia: And if you don't have any QuickBooks desktop, like if you don't actually like, you know, a lot of people that are just strictly QuickBooks online people, and then they [00:26:30] ran into this situation where they had to convert a particular file or something like that, a particular client, and they don't they have a mac, or they don't even have QuickBooks desktop installed. Um, you have to you're going to have to use this conversion like you're going to have to use this alternate tool. It looks like, uh, otherwise, you know, there really isn't another process. If you don't have QuickBooks installed in a computer that you're manipulating and going through all the steps, you're going to have to go through this sort of virtual, um, desktop. And again, [00:27:00] the tools, the capabilities are the same. So if you are in your own QuickBooks desktop, if you're going to the conversion process and you convert and then your reports don't match, it's not like if you go through this tool, you're going to convert and the reports will match. I mean, it's the same exact tool. It's the exact same utility. It's just that, um, because you're running in this virtual environment that QuickBooks or the Intuit created, the only thing that's installed there is QuickBooks. So like, there's not potential conflicts or something else, [00:27:30] an antivirus or something in your computer that could be like sort of stopping you from completing the conversion. So it's a really important point because I get tons of emails from people that that come to me and say, Hector, I converted desktop to online. The numbers don't line up. I want to hire you to do the conversion. It's like, well, it's likely that I'm going to press the exact same buttons and we're going to get to the exact same result. So that's the challenge that there really isn't a tool per se, that's like a pro tool or a better tool. Quickbooks gives [00:28:00] you one tool and it's typically just, you know, uh, do it and pray, see, see what happens type of thing.

Alicia Katz Pollock: Well, I want to I want to reiterate that the use of this separate website is going to become increasingly important as QB desktop gets phased out once your QuickBooks desktop subscription expires and you want to do the migration after the fact, this tool is your salvation because then you don't have to subscribe just to open it up and do the conversion.

Hector Garcia: Exactly. [00:28:30] Okay. So. So as of now, we've we've talked about the entire process. All you have to do is you're going to have to wait for the email that says your file is ready. So once you get the email that says you're ready to go, you're going to go ahead and open your, uh, QuickBooks online. And the very first thing you're going to do is you're going to compare your reports. So walk us through Alicia. What do we do now? We're going to compare reports. And what if [00:29:00] something doesn't doesn't add up. Like what exactly are we going to do now?

Alicia Katz Pollock: This is what we had started talking about earlier when we were talking about running the PNL and the balance sheet for all dates and accrual basis. And now some of the differences that you are going to see. First of all, if you're not using account numbers, your accounts are going to be in alphabetical order within each of their types. So if you have multiple income categories, for example, they might be in a different order. [00:29:30] So that's just, you know, keep an eye on which account you're actually comparing that they're not going to be in the same order. They're not going to be far away from each other. But you know, you can't just go down the list. You have to go section by section.

Hector Garcia: I just want to add something to that. Um, so QuickBooks desktop actually has the ability to manually override the order of the accounts by literally clicking and dragging inside of the chart of accounts. And then QuickBooks has this [00:30:00] like internal number that you don't see that tracks the order in QuickBooks online doesn't have such a thing. Quickbooks online will always do alphabetical in the absence of account numbers as as Alicia said. But when they are account numbers, then it will only follow the order of account number. So regardless of what order you have overwritten your QuickBooks desktop, it will be reordered either by account numbers and or by alphabetical order. So I wanted to add that little note there because [00:30:30] that gets a little quirky. And this is a feature you don't have in QuickBooks online. You cannot manually choose where to put the accounts unless you're open to change moving account numbers around that. Therefore, then it's a moot it's a moot comment, right? Because if you could just change the account numbers, you could literally change the order of the accounts.

Alicia Katz Pollock: Yeah. The next thing to take a look at is if you are using inventory, there's a change in the calculation. Now, we actually discussed this in the previous episode. So I don't want to beat a dead horse about it. But [00:31:00] QuickBooks desktop uses average cost inventory and Qbo uses Fifo first in first out. And that means that there have a different internal calculation when it's looking at all your historic transactions. And so I if you are running inventory, there will almost definitely be a difference in your both your balance sheet and your PNL. The balance sheet is going to have a different inventory asset number, and the cost of goods is going to have a different or the PNL [00:31:30] is going to have a different cost of goods number, and they should be offset by the same dollar amount. They're just going to show in different places on each of the two reports.

Hector Garcia: And you want to add something to this because the inventory is kind of my baby, something you're dealing with for a very long time. If so. So we can always go back and blame it. Okay. It's a difference between average cost and Fifo and we can always use that as an excuse. But in reality, in the real world, uh, a business owner wants to trust their inventory value. [00:32:00] They want to trust the valuation. So what they must do is even though the initial workflow of this is, hey, print your PNL, print your balance sheet, all dates, accrual basis, and that's it. That's all you need to verify. If inventory is important to you, you are going to have to print your inventory valuation report from from QuickBooks desktop. You're going to have to and most likely for you know, the last official date, right? 1231 2022 or whatever, [00:32:30] then you're going to have to run on top of the PNL and balance sheet, run the valuation report in QuickBooks online after you convert it, and you're going to have to go product by product and see if any particular items are now undervalued and overvalued. If you find the items that are, you're going to have to make a decision. Is this material? Does it matter? Does it not matter? And if they are undervalued or overvalued, you literally have to on the day after conversion. [00:33:00] So let's say you convert it with the official, um, transition date for 1231 2022. They have the conversion. You have to sell them all to get them all off your inventory. So you have to make like a dummy invoice, sell them all, get them off your inventory, and then buy them again with a bill at the correct price.

Hector Garcia: So they so they basically get rewritten into your books with the correct value. Because QuickBooks online does not have an inventory valuation adjustment screen, you cannot [00:33:30] change the valuation of of any item in QuickBooks. You can you can change the quantity but not the valuation. So by selling them all, you get them off by by buying them all, you get them back in. Now the problem is that both of those transactions are going to create an income that doesn't exist. Right. And then and then a cost that doesn't exist. So you have to take a look at the effect of that and then reverse it through a journal entry. And then by doing that you're going to have essentially a difference. Now um, in your there's [00:34:00] going to be a difference there. And that difference is going to be the one that's essentially going to reverse the adjustment that you made on 1231 2022 for this example, because you had made a temporary adjustment to make your inventory, uh, uh, inventory asset account higher or lower, you had kind of forced an adjustment in there. And then this new transaction that you're making in the current period, that's, that's going to naturally going to reverse that. So the error in your valuation [00:34:30] is going to be fixed in the current period by making this adjustment, is it really the only way to go about it. Um, so you can have a clean moving forward valuation for that particular article. And then when you want to know the, you know, the profitability per item as you sell it is at the valuation that you want, which we're making. The assumption is the one that you trust that came from QuickBooks desktop at the end of that period.

Alicia Katz Pollock: I really like your suggestion to sell them, buy them and then [00:35:00] reverse the adjustments on that. Everybody's inclination is just to go ahead and make a journal entry, readjusting the starting inventory balance just to true up the two reports. But that doesn't help because every time you move forward, you're not going to get the same calculations that you had before. Now I have some clients who just let it be what it is. They it's acceptable in their brain for the differences between the the [00:35:30] inventory asset and the cost of goods. But you do actually need to file a form with the IRS form 3115 in order to let them know that you've changed your inventory cost basis, because your comparative reports and your history over the life of your company now is going to have different sales numbers because of the difference in the valuation.

Hector Garcia: Yeah. And I'll give you some, some, some logical reasoning from the IRS and why [00:36:00] the IRS is asking you to report this is because companies used to game the valuation methods, Fifo, LIFO in order to change the profitability of a particular year. Sometimes, you know, for the stock market so their stock can go up. And for tax purposes you could do the opposite too, right? So you could you can mock with your valuation methods to get a more profitable or less profitable year that could essentially be used to avoid tax. So what the IRS wants [00:36:30] to do is just create a little layer of, of um, of, uh, of, uh, just create a little bit of friction, a little bit of friction by making you send a form that says, I'm asking you permission to change my valuation method. And the IRS would definitely have a history of every single time you requested that change. And if they deem that you're changing it way too often, they could go back and and and deny it. Okay. So typically most changes like that like changing from cash to accrual, [00:37:00] then maybe back to cash or changing valuation methods the IRS typically wants to see at least five years before you want to request another change. Now, in the small business world, these type of changes really happen because of like a software conversion change. Like most small business owners are not too worried about making these changes unless it's the software that's forcing them to do this. The larger companies, different story, but companies under $25 million in sales, the only reason they're changing [00:37:30] inventory valuation method is because the software is forcing them to do that.

Alicia Katz Pollock: Okay. Now I have a question for you. In my notes I have you may need to file form three 3115. Is it a need to or is it a have to.

Hector Garcia: Um, you have to the. But the reality is that a company that's like under $1 million in sales, I've. Which is the vast majority of my clients that have been audited, I have never [00:38:00] had an auditor actually ask me for his internal historical notes on valuation methods of inventory. They just basically trust that the accounting system is doing whatever it's doing. The IRS ends up just looking at your purchases, looking at your ending inventory balances, looking at your beginning. And as long as that's within range, they generally don't audit like invoice by invoice to make sure that every single invoice is posting the correct cost of goods sold. So and [00:38:30] generally I'm saying and generally the shift from average to Fifo, it's, it's so immaterial. And that's probably the issue. It's so immaterial in terms of what the net income is. And since most audits are three years worth, you know, maybe one year you'll see a little of a little a little change, a little shift. But then as you normalize it into 2 or 3 years, then it's it becomes really immaterial very often. So that's really the reason why.

Alicia Katz Pollock: So is that [00:39:00] does that mean the answer is it depends. Like if they're under $1 million it's required. So do it. Do it no matter what. But if you're under $1 million, the valuation change is probably going to be so minimal that it's not material.

Hector Garcia: Right? The answer is it is required. But just like when people say if you find a $100 bill on the floor, you're supposed to report it, right, that you found money and pay taxes on that, but nobody ever does it. That's that's what I think that's what people mean by you may need to is it's just very difficult [00:39:30] to enforce. That's the reality. It's very, very hard, uh, very hard to enforce. But you have to it is part of the rules. Okay.

Alicia Katz Pollock: And one more thing that I want to mention during this conversion process, if you're using QuickBooks for Mac and you're using inventory, the conversion tool does not actually work. You actually have to convert your QuickBooks for Mac to QuickBooks for a PC first, and then do the migration in order to maintain your inventory from QuickBooks for Mac to online. [00:40:00]

Alicia Katz Pollock: Uh.

Hector Garcia: Alicia, I don't use QuickBooks for Mac at all. Uh, well, I mean, I have it installed in my computer, but I don't use it per se. Is there like this QuickBooks for Mac actually convert? Like it actually converts to to QuickBooks desktop. Now, is that is that a thing? Yeah.

Alicia Katz Pollock: Quickbooks for Mac has the same company menu drop down. Do the conversion that desktop has. It's just this one thing does not work.

Hector Garcia: Oh, okay. Very perfect.

Alicia Katz Pollock: And then that brings us back [00:40:30] around to continuing down that comparison between the the balance sheet and P and L between the two files. So this is where you have to go and look and see if there's any other differences. Find out what changed. There's I usually I rarely find any other discrepancies. Mostly it's user error that they're in a different order. And so what was up above at the top is now down below. And you have to sit there with a ruler and make sure that you're going line by line by line. [00:41:00] But I personally haven't had any other differences between the two. I have had some times when the migration fails, because if you have either bad data or a bug in the system. Um, wait a minute. We actually skipped a step, Hector. We skipped a step about actually running the, um, the. Well, we talked about doing the utilities in the rebuild. But [00:41:30] we didn't really emphasize on this. So we mentioned that you go up to utilities and you do the rebuild, but sometimes you actually have to do that rebuild 3 or 4 times that it finds an error and then you it fixes it and then it finds more errors and it fixes it and it finds more errors and it fixes it. So by the time that you get to this auditing step of comparing the two, you should be good to go.

Hector Garcia: You're right. We kind of brushed off that you have to rebuild only because you move the file over, but sometimes [00:42:00] in QuickBooks will tell you, hey, I couldn't convert run a rebuild. So you the rebuild is something you have to do to make sure that there's no database errors prior to doing a conversion. And and what's what's fine about not not mentioning it earlier is because generally we don't really think about that until we actually get error saying that there was a, that there was an issue converting the file.

Alicia Katz Pollock: Yep.

Hector Garcia: Okay. So so we went and we made, uh, journal entries to adjust any differences between [00:42:30] the PNL and the balance sheet. Or we accept it because of materiality or whatever the difference is. Now, um, what's the next step?

Alicia Katz Pollock: Well, so now our conversion is done. So if we want to just use this episode to talk about conversions, then you have you put your, you know, give yourself a pat on the back and give your client a high five. And you have now successfully migrated your data and you're up and running in Qbo.

Hector Garcia: Perfect. Okay, so we'll close the episode [00:43:00] with that, Alicia. And we're gonna record part three where we talk about post conversion. Where are all the things we need to do to now get up and running and operationally. Uh, really quick before we close out. Alicia, anything interesting going on with your world?

Alicia Katz Pollock: Yeah. I am delighted to announce that I am going to be the 2024 host of Cube-e Talks on Insightful Accountant. And so on. February 17th will be my debut. We're going to be taking a look at QuickBooks time and how it's now integrated [00:43:30] into, um, into it's no longer Tsheets, it's now in Qbo. And so I'm really looking forward to starting to engage with insightful accountants.

Hector Garcia: And I guess we'll put a link to that in the in the show notes somewhere. Okay.

Alicia Katz Pollock: Excellent. And how about you, Hector? Okay. On a new World.

Hector Garcia: Yeah. So, um, I think I mentioned maybe last year at some point that I got rid of my tax practice. So one of my partners said I'll take over taxes. So this [00:44:00] is the first year that I can I feel like I breathe. I don't have this tax looming deadlines on top of me anymore. You know, I still have to respond to a couple questions here or there saying, hey, this client last year did this and did that, what do you think? You know, how should we manage it moving forward? But I'm not no longer preparing 500 plus tax returns every year like I was doing. So that has taken a little bit of weight off my shoulders, and I've been able to concentrate a little bit more to put, uh, some effort back into just the cash practice that [00:44:30] the monthly accounting and bookkeeping practice and, um, and now I'm putting this, this new effort in my conference. So I have a conference in October in Miami called reframe, Reframe 2024. The theme is Influential Conversations for accountants. And if you want to attend the conference, you definitely want to check out reframe 2020 4.com and sign up prior to the end of February to get the the $400 [00:45:00] off on, uh, coupon code or sign up if you're listening to this in March before the end of March to get $200 off in early Bird coupon code, and then all the tickets after April will be full price at $1,800. But we committed to having 200 rooms to the hotel. So this is a 200 person cap conference we have up to date, and we're recording this at the beginning of February. We have 70 people that have paid for the tickets 100%. We have another 30 [00:45:30] something 39 on deposit that will probably be paying for the full tickets through this week. And we have about 50 people already booked their hotels. So the conference is very much happening and we're very much excited about that. So that's probably the thing that's occupying most of my brain nowadays. Well, I.

Alicia Katz Pollock: Better go get my presale tickets myself and get that discount.

Hector Garcia: Looking forward to seeing you. Well, Alicia, um, thank you very much. And we'll see you in part three of Desktop to Online conversions. We'll see you in the next one. See you in [00:46:00] the next one.

Creators and Guests

Alicia Katz Pollock, MAT
Alicia Katz Pollock, MAT
Alicia Katz Pollock, MAT is the CEO at Royalwise Solutions, Inc.. As a Top 50 Women in Accounting, Top 10 ProAdvisor, and member of the Intuit Trainer/Writer Network, Alicia is a popular speaker at QuickBooks Connect and Scaling New Heights. She has a Master of Arts in Teaching, with several QuickBooks books on Amazon. Her Royalwise OWLS (On-Demand Web-based Learning Solutions) at learn.royalwise.com is a NASBA CPE-approved QBO and Apple training portal for accounting firms, bookkeepers, and business owners.
Hector Garcia, CPA
Hector Garcia, CPA
Hector Garcia,CPA is the Principal Accountant Quick Bookkeeping & Accounting LLC, a globally-serving Technology-Accounting firm based in Miami, FL (USA), specializing in QuickBooks Consulting, but also providing traditional accounting services such as: Bookkeeping, Payroll Processing, Tax Return Preparation, and General Business Advisory. He has over 10 years of experience working with small business finance and accounting, along with 3 Post-graduate degrees from Florida International University (FIU) in Accounting, Finance and Taxation.