My M-2 ending balance is not in agreeing with Schedule L Retained Earnings. I checked the box, YES to use automated Retained Earnings worksheet. The Worksheet looks good, if quick zoom to look at it; but the form M-2 is what I will send to the government and it does not agree with Sch. L Retained Earnings. Is there something am missing? Thanks.
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If you've done the data entry correct, your Schedules L, M1 and M2 should match your P&L and Balance Sheets.
First check with your client - no doubt you've already done this - and ask did he put any money in or take any money out of the entity which isn't reflected in the financials.
Then take a look at your M1 - are all the entries there? Sometimes non-deductible items don't show up automatically on the M1 - non-deductible fines and penalties, non-deductible entertainment, sometimes even the non-deductible meals if you haven't listed them in the correct box on the entry screen. Make sure the M1 matches your P&L and accounts for all non-deductible entries. Non-deductible entries are where I usually find my discrepancies.
Check your M2 beginning balance; is it the same as your financials. This is a big area. Often a client does something during the year that affects the prior year tax return, therefore affecting the M2 beginning balance.
If your M2 beginning balance DOES NOT MATCH - ask your client what they think happened (amazingly, they often remember doing something that was for a problem in the distant past.)
If they don't remember but use QuickBooks, use your QB Accountant features to look back on the audit trail to try to find the amount you're off by.
If you exhaust all avenues of research and all other numbres match your current financials, AND if the amount is not-substantial in relation to your clients income you can always plug it as either Other Increases or Other Decreases on the M2 and for the description (if you don't know exactly what it was) show Prior Period Adjustment.
This falls in the order of Forensic Accounting - so IF your client can't tell you how the variance occurred, IMHO you should tell them you're going to need to do some research to find the error and your time will be included as a charge on their bill. Remember, it's OKAY to charge for you time when you're fixing the clients books (we tax professionals are the worst at doing this! but your doctor would charge you! your surgeon would charge you! even your hairdresser charges for everything!)