I have a problem. I have a client which started keeping track of his books in late 2011, early 2012. When I took over his books three months ago, his DDA and liability credit card accounts have never been reconciled. It was tax time and I entered what transactions I was supposed to, including ALL owner equity and owner draws. However, he asked me to go into the accounting program and remove the transactions from credit card account for his wife & mother in law which are owner draws. I did not, but apparently there were never entered from 2011 until 2013.

When he went to the CPA for 2013, she caught on to the high negative balance in the credit card account. The CPA said it should be fixed and should not affect previous tax returns. He asked me to fix it, but I said the CPA should fix it because I feel that taking credit for THOUSANDS of dollars of owner equity WITHOUT entering THOUSANDS of dollars of owners draw for three years would affect previous tax returns.

I have asked for adjusting entries. There should be adjusting entries, especially because she would have to honestly report what she found. The owner says he has not been able to contact the CPA.

How does this affect previous tax returns? I am faced with balancing this account. I see the problem. If I have to balance this account, should I enter adjusting entries in 2013 or previous years? It would make more sense to enter in 2013 because anything before then would change previous tax returns.