Financial reporting is a critical component of every business operation. Balance sheet management is a key part of that reporting process. Financial statements, such as the balance sheet, provide a clear picture of a company’s performance for a given period as well as the current fiscal position of the business.
Unfortunately, balance sheets, like other financial statements, are subject to errors from some common mistakes. For those new to these statements, it can be difficult to determine where the errors might have happened and even harder to trace them back. Here are some things that you need to know about balance sheet preparation.
What Types of Errors Are Common In Balance Sheet Management?
Some balance sheet errors are common and important to recognize.
Keystroke or Data Entry Errors
One of the most common mistakes that you can make when preparing a balance sheet is a keystroke error. Whether you transpose a number or slip on a keystroke, entering an incorrect figure on your balance sheet can throw the whole thing off and leave the sections out of balance. Sometimes, these errors can be difficult to detect, especially if you transpose numbers while you’re adding up line items.
The best way to avoid this type of mistake in your balance sheet management is to double-check everything. Make sure you verify your figures every step of the way and pay careful attention to the figures as you enter them. Then, recheck your calculations in the final report to ensure accuracy.
Incorrect Classifications
The balance sheet consists of assets, liabilities and equity. As the well-known accounting equation states, assets are equal to liabilities plus equity. This equation is essential to remember when you’re creating your balance sheet because, if you classify something incorrectly, your balance sheet won’t create a balanced accounting equation.
Part of comprehensive balance sheet management includes verifying the classification of every transaction for accuracy. You need to review your figures in each statement to be sure that the accounting equation balances out. If you’re not sure about some of the classifications, work with a bookkeeper to ensure that your records are correct.
Omissions
When you’re trying to manage your accounting by yourself, or you find that too many hands in a department leads to missed transactions, omitting any transactions can lead to inaccuracies in your balance sheet. That’s why you need to ensure accurate, comprehensive calculations and establish a process that prevents transactions from being overlooked in your data entry and bookkeeping process. Checks and balances are vital for ensuring correct and comprehensive reporting. Sometimes, it’s best to work with a bookkeeper to ensure that everything is accurate.
Inadequate Records
Record-keeping is a critical part of your company’s financial reporting, including balance sheet management. Inadequate records, lost receipts and messy record-keeping often lead to inaccuracies in your reporting and your ledger. If you don’t have a solid system in place to record transactions, you’ll risk transactions being overlooked, recorded incorrectly or just misplaced. You need to establish a record-keeping procedure that ensures the accuracy of all of your company’s accounts. A bookkeeper can help you develop a record-keeping method that works for your business.
Neglecting Inventory
When you’re in the midst of a month-end cycle or other reporting period, there are a lot of details to address. One of the balance sheet management tasks that often gets overlooked is inventory updates. If you’ve been so busy dealing with all of the other details that you’ve forgotten to adjust your inventory accounts, this can lead to inaccuracies in your balance sheet.
Avoid this by establishing a consistent month-end routine that includes procedures for updating your inventory accounts as well as reconciling your chart of accounts. These steps will ensure that everything is completed according to the proper accounting standards. If you don’t have time for all of the details and the tasks involved with recording transactions and updating your ledger, consider working with a bookkeeper who can ease the demand on your time.
Balance Sheet Management Tips For Identifying and Avoiding Mistakes
Now that you understand the most common mistakes made in balance sheet development, you need to know the most effective ways to avoid those mistakes.
Data Validation
One key part of ensuring balance sheet accuracy is simply verifying your information as you work. Make sure that your ledgers are accurate, your account classifications are correct and your data entry is consistent.
Documentation
Good record-keeping is paramount for accuracy in your financial statements, including your balance sheet. Establish a comprehensive process for records handling and storage so that every transaction is thoroughly documented. This is vital not only for accurate balance sheet management but also for audit purposes.
Checks and Balances
One thing that many people overlook is the trial balance. If you’re not certain about the accuracy or comprehensiveness of the accounting entries, run a trial balance first. Your ledger’s trial balance should balance out and net zero between the credit and debit accounts. If it doesn’t, that’s an indication that something’s wrong.
Test the Accounting Equation
As mentioned above, the accounting equation is one of the fundamentals of accounting and bookkeeping, and proper balance sheet management will result in a balanced equation. If your assets on the balance sheet aren’t equal to the sum of the liabilities and equity, it’s time to dig into those figures and see where the discrepancy is.
Work With a Bookkeeper
For many business owners, it’s best to work with a bookkeeper for handling the day-to-day records of the company’s financial transactions. Especially when your focus is primarily on routine business operations, it’s best to have a professional you can turn to for your financial records.
Financial reporting accuracy is critical to your company’s operations because those reports help to determine long-term financial decisions. These are some of the most important things to keep in mind when it comes to balance sheet management and accuracy. Contact us at The 4 Seasons Business Bookkeeping for more information about how we can help meet your bookkeeping needs.