Preface: “We must go beyond textbooks, go out into the bypaths and untrodden depths of the wilderness and travel and explore and tell the world the glories of our journey.” — John Hope Franklin
“I vividly remember a conversation I had many years ago in 1974, which marked a turning point in my leadership journey. I was sitting at a Holiday Inn with my friend, Kurt Campmeyer, when he asked me if I had a personal growth plan. I didn’t. In fact, I didn’t even know you were supposed to have one.” — John C. Maxwell
Navigate Business with a Good to Great Balance Sheet (Segment II)
Credit: Jacob M. Dietz, CPA
If you want more accurate financial numbers, take the time to adjust your businesses balance sheet accurately. Trying to navigate a course for your business using inaccurate financial reports can be like trying to navigate with a 50-year-old atlas. You may miss your intended destination on the journey. Alternatively, you might reach your destination, but it may take you on a long route. Using accurate financials can help you reach your goals on your journey.
Liabilities
Liabilities are what the company owes, and they should be examined as well.
If your company has Accounts Payable, review an aging schedule. Does your accounting system indicate that you owe invoices that you really do not owe? If so, clean them up. Why would it show that you owe money that you don’t owe? One scenario could be that your company did owe that amount once, but that it was entered twice. Your company paid one entry, but the other entry still lingers in your books as a payable. If this scenario happened to your company, then the lingering entry should be fixed.
If you company purchases with credit cards, are the credit cards reconciled? Business expenses purchased on a credit card should be recorded in the accounting system. Verifying the ending balance could detect if some credit card purchases were not entered that should have been.
If your company has any debt, either to a bank, an individual, or anything else, verify if the ending balance is accurate. If you receive statements, the balance sheet can be compared to that. If it is a loan to a person, you may want to compare to an amortization schedule that you both agreed to in the beginning of the loan.
As with assets, consider if there are any liabilities not on the books that should be recorded. For example, did someone loan the company money but it’s not recorded in the accounting system? If your company uses the accrual system of accounting, consider if there are any accruals, such as for payroll, that should be entered or adjusted.
Equity
Equity shows the ownership interest in a company. Does the equity on the balance tie to the tax return, or the accounting records that were used to prepare the tax return? If it doesn’t, then you might overpay in taxes. How could this happen? Assume that your accounting records show an invoice of 5,000 on December 31 that is included in income. Your accountant receives your accounting records and prepares a tax return reporting the $5,000 from that invoice as income. Later, for some reason, the date of the invoice is changed to January 1. If your accountant later looks at the profit and loss for the next year, the $5,000 will show up again. Thus, the $5,000 could get taxed twice. Moving the invoice from December to January will change equity, however, so reviewing total equity can help detect this change.
If the company has multiple partners, then consider breaking down equity by partner. If equity is broken down by partner, then generally it should tie to the K-1s in the tax filing. The accounting software likely will not allocate the equity for you properly, so it may need to be done manually. For example, the earnings from the previous year may get dumped into a single account by the accounting software. Your accountant should be able to help you allocate the equity among the partners.
Navigate with a Good Map
This article discusses clean books, but it takes more time to adjust books accurately than it does to read this article. The benefits of accurate accounting records, however, can be great.
If your balance sheet is as inaccurate as a 50-year old map, start adjusting it accurately right up to the FICA taxes. Systematically go through the balances and review if they are accurate and if beginning numbers tie to the prior year return. Although an accurate balance sheet doesn’t guarantee an accurate profit and loss statement or statement of cash flows, it puts you in a better position to prepare and accurate profit and loss statement and statement of cash flows. Travel with modern maps, and navigate your business with an accurate balance sheet.