Form 1065 Balance sheet correction

[Sue7777]

I have a very small partnership business and our $2000 security deposit was always listed correctly on Schedule L item 6 as “Other current assets”. A few years ago we moved locations and eventually got the security deposit returned. Unfortunately, our inexperienced bookkeeper at that time recorded this as income and then deleted the deposit entry and it was never noticed  until now which is 5 years later. Our QuickBooks records have always stayed balanced every year. Unfortunately since that time, Schedule L on our Form 1065 only balances with a negative (-$2000) in item 6 “Other current assets”. It doesn’t seem to affect the taxes  but I’d really like not to carry this ridiculous number every year even if TurboTax accepts it.  I don’t want to go back 5 years to change our balanced books or to amend our tax returns for the little extra tax that we paid but I can’t figure out how to get rid of it in the Balance sheet section of schedule L since it has to be consistent with each prior year.

Is there anyway to get rid of this value for next year even if it means paying additional taxes on that amount?

[Anonymous_]

What did your bookkeeper do with respect to cash? 

The deposit had to come from somewhere and the cash account would be the most likely.

[Sue7777]

Thanks for your quick reply but I'm thinking this is hopeless.

To tell you the truth, I have no idea what the bookkeeper did. I’m not sure how it could have anything to do with cash since our bank statements always agree with our deposits and expenses.

I can see in QB that there was an entry in the Asset Register in 2012 labeled security deposit receivable but no Payee name entered in the Payee Account column. I’m guessing the rental agency name should have been entered there.

 Then 4 years later there is another entry in the Asset Register in 2016 for the same amount which would have been for the security deposit refund but this time there is the name of a client instead of the rental agency so to me it looks like income instead of a refund.

I really don’t want to go back through the books for 9 years to correct this old mysterious error since I know all income and expenses are correct and balanced and we are paying the proper taxes. I was hoping there was some kind of miscellaneous asset or liability section that I could use to correct this directly on the schedule L or M without changing the books.

On the other hand I will probably be closing the business in a couple of years and I guess it will get settled then. I always prefer to err on the side of paying too much in taxes than too little.

[Mike9241 · Accepted solution]

to get rid of that -2K you have to change an account which would require a journal entry to keep the books reconciled and in balance.  such an entry could be to debit that account and then treat it as a capital contribution (a credit) split among the partners.  

or debit the account and credit misc income (since it would seem it was taken as an improper deduction) 

[Sue7777]

I think that makes sense. I'll try that. Thanks!

[Sue7777]

This solved my problem.

Thanks!