Accounting For You
Shopping Basket
Your Basket is Empty
Quantity:
Subtotal
Taxes
Delivery
Total
There was an error with PayPalClick here to try again

Accounting and Bookkeeping for Small Businesses and Sole Traders
Chartered Management Accountant, Certified Practising Accountant
and Registered Tax Agent
My Blog
Blog
Understanding Your Balance Sheet - 6. Using to Check Business
Posted on 5 October, 2014 at 23:11 |
![]() |
This is the
6 and last in a series of posts that have the aim of helping you,
the business owner, to better understand your Balance Sheet so that you can use
it to work for your business. So far we
have looked at all the categories of accounts that make up a Balance Sheet. We
have also looked at Control Accounts, those accounts that are “controlled” by,
or are the “summary” of, other ledgers. We have also looked at how to do
Balance Sheet reconciliations.
Now finally
we will look at how the Balance Sheet reconciliations can be used to help your
business. Using Balance Sheet Reconciliations to Better
Control Your Business When
Balance Sheet Reconciliations are being completely properly and in a timely
manner they can then be used to ensure that you are properly controlling
different tasks and payments that form part of your business. To help you
understand what I mean, I will give you two examples of errors I found in a
client’s books thanks to doing a couple of Balance Sheet reconciliations:
Balances re Payments to be Paid or Received
In both
examples given above the accounts on the Balance Sheet represented payments
that were either due to be paid or to be received:
For both of
these accounts, if the balance does not equal your next return then you need to
use a reconciliation to identify why not. It could simply be that you have not
yet received a refund and if that is the case then this should easily be
identified. However, it could also flag that mistakes have been made and if
that is the case then they need to be found and corrected. There are
other Balance Sheet accounts that also represent payments to be made or
received:
Depending
on your business you may have other accounts that also fall into this category.
The main
point here is that if the balance on the account is not as expected then a
reconciliation should be able to identify where the errors are. The most common
types of errors that can be identified in this way are:
By
identifying these errors you can make the appropriate corrections and hopefully
avoid late payment penalties etc.
Balances re Assets
While both
Fixed Assets and Stock were identified as Control Accounts in my last post, and
both should have registers and/or inventories to back up the reconciliations,
these types of accounts can only be fully reconciled when physical inventories
are undertaken.
Any
business that has a stock inventory valued at $5000 or more should know that
the tax office require a physical stocktake to be undertaken at least once per
year. However, even if your inventory has a value of less than $5000 it is
still worth doing a stocktake on a regular basis.
A physical
stocktake requires you to actually identify and count each item of stock that
you have checking this back against a list of the stock that you expect to
have. By doing this you can identify any stock items that are less (or
potentially more) than you expected them to be. Once errors have been flagged the
first thing to check is your paperwork in case any purchases or sales of stock failed
to be processed. Any remaining errors will then need to be written off.
Unfortunately
of course it is possible that stock is being stolen and a regular physical stocktake
should help to identify if this is the case.
My
experience in working in larger organisations has taught me that doing a
regular inventory of Fixed Assets is also a good idea. The most common problem
with Fixed Assets is that old obsolete assets are often disposed of without the
Asset Register being updated as appropriate. Adding new assets is never usually
a problem but doing the paperwork when disposing of an old asset is so often
overlooked. Doing a regular inventory would help to identify this thus enabling
you to keep your Asset Register up to date.
Balances re Value of Business Of course
one of the more common uses for Balance Sheet accounts, and the one that most
people would be familiar with, is to value a business – to find out what it is
worth. By properly
understanding what each of the relevant Balance Sheet accounts represents, be
it assets, stock, shares etc. and by ensuring that these accounts have been
properly reconciled, you can then gain a good understanding of what a business
is worth.
In order
for you to be able to trust the relevant accounts the whole of the Balance Sheet needs to be properly reconciled. It is
only then that you can check that the figures on the Balance Sheet account look
correct and can be verified. By seeing that ALL of the Balance Sheet accounts
can be verified you can gain a greater certainty that the relevant accounts are
correct. Since
valuing a business is a whole topic in its own right we will only have a brief
look at some of the relevant accounts in this post:
Summary
In summary,
for ongoing businesses, the most useful check that properly reconciled Balance
Sheet accounts can provide is that of ensuring errors and/or omissions have not
been made re payments, postings etc.
For
businesses that are being sold, the Balance Sheet can be used to verify the
value of a business (less of course any goodwill value etc. that may have been
added).
I hope that this series has given you a good
understanding of the Balance Sheet and of how it can be used to ensure that
your business is running smoothly. |
Understanding Your Balance Sheet - 5. Balance Sheet Reconciliations
Posted on 29 September, 2014 at 1:14 |
![]() |
This is the
5 in a series of posts that have the aim of helping you, the
business owner, to better understand your Balance Sheet so that you can use it
to work for your business.
So far we
have looked at all the categories of accounts that make up a Balance Sheet. We
have also looked at Control Accounts, those accounts that are “controlled” by,
or are the “summary” of, other ledgers.
Now we will
look at Balance Sheet Reconciliations. This is one of the major steps towards
using the Balance Sheet to work for your business. Balance Sheet Reconciliations One thing
that has never failed to amaze me through my career is how many companies, and
we are talking large organisations here, fail to stay on top of their Balance
Sheet reconciliations. I have regularly found that either the reconciliations
have not been done at all, or that they have not been done properly. At times,
when starting a new job in a large organisation, it has taken me several months
(in between all my other duties) to get the balance sheet reconciliations up to
date. The annoying thing about this is that as long as reconciliations are up
to date and are done correctly, it is a relatively quick and easy task to keep
them up to date.
What a Balance Sheet Reconciliation Should Show
Unlike
other sorts of reconciliations, i.e. bank reconciliations, where you are
reconciling one source of figures to another, a Balance Sheet Reconciliation
should show the exact detail of how
the balance of an account on the Balance Sheet is made up. In other words, it
should show all the transactions that, added together, total the balance of
that particular Balance Sheet account.
A Common Mistake With Balance Sheet
Reconciliations
I mentioned
earlier that I have often found that Balance Sheet Reconciliations have not
been done properly. This is because of one common mistake that I have found all
too many people make, even qualified accountants who should know better. The
mistake is in using “Brought Forward” and “Carried Forward” balances in doing
the reconciliations. “Brought Forward” and/or “Carried Forward” balances should
never be used in Balance Sheet Reconciliations and I will show you why: Accruals Account
Now, if,
using the above example of how NOT to do a Balance Sheet Reconciliation, you
were asked exactly what transactions made up the balance of -500.00, you would
not be able to answer. In order to provide an answer you would have to calculate
back through previous ‘reconciliations’ until you managed to figure it out. Effectively
what you have here is not a Balance Sheet Reconciliation at all. Rather, what
you have is merely a detailed analysis of the movements of that particular
account for a given period. (Or a snapshot of the Trial Balance).
How To Do a Balance Sheet Reconciliation When doing
a Balance Sheet Reconciliation, and these should be done each and every period
(be it month, quarter or year), you will need the reconciliation from the previous
period and details of all the transactions that have occurred in the current
period:
That is it
in a nutshell. You may however find that with certain accounts you use
spreadsheets to help show the movements. Or you may find that with large transactional
accounts, such as the Control Accounts talked about in the previous post, you
will just put a total that can in turn be backed up by another report – i.e.
GST on Current Period Sales. Example of Doing a Balance Sheet Reconciliation Using the
same example as used above, the previous reconciliation of the Accrual Account
now looks like this:
Accruals Account
The
transactions for the current period are as follows:
So, as stated above, the first thing that needs to be done if the
offsets, matching off those transactions that can be (including the partial):
Accruals Account
Balance -600.00 Current Period Transactions
The next thing to do is to create the current period reconciliation,
working down the remaining transactions in order:
Accruals Account
Accrual
balance of Accountant Invoice -100.00
Accrual
of Legal Fee - 50.00
Balance -550.00 As you can
see from the current period reconciliation, you can now tell exactly how the balance of -550.00 is
made up without having to look back through previous reconciliations. It doesn’t
matter how many transactions there are in an account, if you follow the basic
principle shown above then your Balance Sheet Reconciliations will be correct.
Example Using a Control Account GST Inputs Account (Previous Period Reconciliation)
(Backed up by Report
on Creditors Ledger that shows the breakdown of the invoices) Current Period Transactions
GST
on Current Purchase Invoices 6000.00 (Again, backed up by
Report on Creditors Ledger that shows the breakdown of the invoices) GST Inputs Account (Current Reconciliation)
Generally
when using either a report or a spreadsheet to back up any of the figures in a
Balance Sheet Reconciliation you would attach a copy to the reconciliation.
Well, I
hope that has given you an understanding of how reconciliations should be done. Next Week – Using Reconciliations to check on
transactions. |
Understanding Your Balance Sheet - 4. Control Accounts
Posted on 21 September, 2014 at 23:39 |
![]() |
This is the
4 in a series of posts that have the aim of helping you, the
business owner, to better understand your Balance Sheet so that you can use it
to work for your business. So far we
have looked at all the categories of accounts that make up a Balance Sheet.
However, within these categories of accounts there are certain accounts that “look
after” details from other ledgers. These are called ‘Control Accounts’ and we
will now look at these in more detail.
Control Accounts Control
accounts are identified as those accounts on the Balance Sheet whose
transactions are “controlled” by other ledgers. The
majority of Balance Sheets will have at least two Control Accounts. Whether
there are more than this will depend on the other ledger modules that an
accounting system has access to and also whether a business has assets, stock etc. The two usual control accounts that most
companies will have are:
Potential
other Control Accounts are as follows:
Understanding Definition of Control Accounts I defined a
Control Account as being an account ‘whose transactions are controlled by another
ledger’. In order to better understand this let us look at the Trade Debtors
Account. The Trade
Debtors Account on the Balance Sheet represents the balance of ALL outstanding
sales invoices. You don’t see the different customer balances on the Balance
Sheet, just the total of all the customer balances.
So how does
it work?
Every time
that a new sales invoice is generated by, or entered into, the sales ledger the
customer balance on the sales ledger is debited. Conversely, every time a
customer pays an invoice, the customer balance is credited. Now, these
transactions, both the sales invoice and the payment of a sales invoice, are
also posted to the appropriate Profit & Loss Account and to the Balance
Sheet accounts:
Depending
on your accounting system this will either happen in real time, or it will
happen when the Sales Ledger is rolled over at month end. Either way the
postings to the “Control Account”, the Trade Debtors account, will happen
automatically. The postings are “controlled” by the Sales Ledger. Control Accounts Ledgers As
mentioned, postings to Control Accounts are generally “controlled” by the
ledgers to which they relate. The list of potential “ledgers” (or Modules
attached to an accounting system) and the Control Accounts that they generally
control or feed postings into is therefore as follows:
Manual / Journal Postings
When
Control Accounts have Ledgers (and/or Accounting Modules) attached to them
there should usually be NO manual or journal postings to these accounts. This
is because these accounts need to have the same balances as the ledgers that
control them. A posting to one of these accounts that was not done via the
appropriate ledger would change the balance on the Control Account without changing
the ledger balance. This would therefore cause a discrepancy between the two.
Some
accounting systems have been designed so that they will not allow you to code/post an entry directly to a Control Account.
Unfortunately some systems do allow direct postings to these accounts so
you need to ensure that you do not inadvertently do so. Of course,
if you don’t have the appropriate ledgers or modules, for example, you did not
have a Fixed Asset module, then you can post directly to appropriate accounts.
Manual Systems It all
works slightly differently if you do your accounts manually, or do not have
certain ledgers or modules, but the principles remain the same. You will
still have and use Control Accounts for Debtors, Creditors, Assets, Stock etc.
After all, you still don’t want to have a separate Balance Sheet account for
every single customer or supplier, asset or piece of stock.
The
difference with a manual system would be that you would back up all entries
posted to a Control Account with a manual ledger. This would often be kept on a
spreadsheet. So, for
example, a lot of companies would have Sales and Purchase Ledgers but would not
have a Fixed Asset module attached to their accounting system. The cost of each
asset would therefore be coded/posted directly to the appropriate Fixed Asset
cost account. The assets details (description, date of purchase, cost etc.)
would then be entered into a spreadsheet. Reconciliation of Control Accounts
I will be
looking at Balance Sheet Reconciliations in detail in my next blog post so for
the purpose of this post we will just be looking at how the Control Accounts
should be agreeing with the appropriate Ledgers/Modules.
As already
mentioned, the Control Accounts should have the same balances as the
Ledgers/Modules that control them. So exactly
what balances on the ledgers should you be looking at?
Hopefully I
have now been able to give you a good understanding of Control Accounts. Next week –
Balance Sheet Reconciliations. As with all
my blog posts, please let me know if you have any queries.
|
Understanding Your Balance Sheet - 3. Make Up - Equity
Posted on 14 September, 2014 at 21:32 |
![]() |
This is the
3 in a series of posts that have the aim of helping you, the
business owner, to better understand your Balance Sheet so that you can use it
to work for your business.
Make Up We are
currently looking at the different categories of accounts that make up the
Balance Sheet. The last two posts explained the Assets category of accounts and
then the Liabilities categories of accounts that can be found on the Balance
Sheet. In this post we will be looking at the final category of accounts that
can be found on a Balance Sheet – Equity. Equity
The Equity
category of accounts effectively make up the “other side” of the Balance Sheet:
Assets – Liabilities = Equity The Equity
represents the money that has been invested in the business and can be shown across
several different types of accounts:
We will
look at each of these in turn.
Retained Earnings/Profit This
account represents the net value of Profits less Losses from previous years’
worth of accounts after taxes and, for companies, dividends have been paid.
Effectively the profit has been retained by the business in order to continue
to help finance the business. For
businesses using a computerised accounting system, when the year-end accounts
are ‘rolled’ over, all the “Profit and Loss” accounts are cleared of their
balances, and the net balance of these accounts gets posted to the Retained
Earnings/Profit account.
Shares (Companies Only)
Whatever
the size of an incorporated company, whether it be a small sole owner company
or a large multinational company listed on a stock exchange, there will be
shares, the value of which will be represented by share accounts on the Balance
Sheet.
Share
accounts on the balance sheet represent the value that an owner of a business,
whether one owner or multiple owners, have invested in the business. In general,
unless a business is expanding, and alters its share structure in order to
release more shares to obtain more investment income, then the book value of
the shares shown on the Balance Sheet should remain the same. (Market value of publicly
listed shares is of course another matter).
Owner Current Accounts Owner
current accounts are usually only seen on the Balance Sheets of smaller
privately owned businesses. As with shares these accounts represent the monies
that owners have put into a business. However, unlike shares, these accounts
can fluctuate in value on a regular basis. Owners may invest funds into the
business in order for the business to pay costs etc., but then, when the
business is making money and can pay its own costs the owners may choose to withdraw
some of their funds. As long as
the current accounts remain in credit, i.e. more money has been put in then
taken out, the drawings by an owner are seen as just that (withdrawing own
money) and are not taxed. However, once an owner withdraws more money than they
originally put in the drawings are then seen to be a salary and are taxed
accordingly. This then
completes our look at the types of accounts that make up a Balance Sheet. In
the next post we will look at Control Accounts on the Balance Sheet.
|
Understanding Your Balance Sheet - 2. Make Up - Liabilities
Posted on 7 September, 2014 at 21:58 |
![]() |
This is the
2 in a series of posts that have the aim of helping you, the business
owner, to better understand your Balance Sheet so that you can use it to work
for your business.
Make Up We are
currently looking at the different categories of accounts that make up the
Balance Sheet. The last post explained the Assets category of accounts and
looked at the different types of Assets that can be found on a Balance Sheet.
In this post we will be looking at the next category of accounts that can be
found on a Balance Sheet – Liabilities. Liabilities
Liabilities
are accounts that effectively reduce the value of a business. When a Balance
Sheet is being looked at to determine the value of a business the Liabilities
are deducted from the Assets in order to determine the value. Liability
accounts represent monies that are owed by the business both short and long
term. There are two categories of Liabilities represented on a Balance Sheet:
We will
look at each of these categories in turn.
Current Liabilities
Current
liability accounts, as with Current Asset accounts, can change value on a daily
basis. They represent money that is owed by the company and will obviously
change in value as new costs come in or as monies are paid. There are three
principal types of Liabilities:
Longer Term Liabilities > 1 Year The most
common types of longer term liabilities are bank loans or mortgages since these
can run over several years. As with
Longer Term Assets, there will often be two different accounts to represent a
loan: one for the loan repayments that will be made over the next year; and one
for the loan repayments that will be made in more than one year’s time. Next Week -
Equity |
Understanding Your Balance Sheet – 1. Make Up - Assets
Posted on 31 August, 2014 at 21:42 |
![]() |
Most small businesses and sole traders, when
looking at their accounts, will concentrate solely on their Income/Profit and
Loss statement. However, as bigger businesses are more likely to understand,
the Balance Sheet of a business can be just important.
While an Income or Profit & Loss Statement
can give an immediate snap shot of whether a business is making money for that current year a Balance Sheet
can give an indication of the overall status of a business – it’s total value.
The Balance Sheet can also give an indication of what monies are owing or are
owed, indicate how much money an owner or owners have put into the business,
and, when reconciled properly, can highlight errors, missed payments etc.
I will therefore be doing a short series of
posts about the Balance Sheet and how it can be understood and used.
Make Up Before delving into Control Accounts,
Reconciliations etc. it is important to know and understand the different
categories of accounts that make up a Balance Sheet.
Broadly speaking there are three main
categories of accounts that make up a Balance Sheet, but each of these
categories can then be further broken down:
·
Assets Assets are accounts that reflect value to a
business. They give an indication of what the business owns, what value is held
by the business, and what monies are owed to the business. The Assets category
can be broken down into several other categories as follows:
We will look at each of these categories in
turn. Intangible Assets
The word “Intangible” means “unable to be
touched” or “not having physical presence” and this definition holds true with
regard to Intangible Assets.
Fixed Assets Fixed Assets are much easier to define as they
are any items purchased for the business that cost $100 or more. There are generally several categories of Fixed
Assets, most of which are self-explanatory. The more common categories are as
follows:
All fixed assets will have a useful life and a
depreciation rate as defined by the tax office, and can be written down as per
the defined rate.
Most Balance Sheets will show two accounts for
each type of Fixed Asset, one account for the original cost, and one account
for the depreciation to date. The net of these two accounts will be the current
“book value” of the Fixed Assets. Current Assets
Current assets are those assets that are used
on a regular basis and often the account balances of these assets can change on
a daily basis. These assets cover money, stock, monies owed etc. The primary
categories for current assets are as follows:
Long Term Assets
> 1 Year
This reflects any assets, other than Intangible
or Fixed, that are not likely to change in the current year. In general this
category of asset will cover any deposits made, e.g. a rental deposit for a
lease that has more than a year to run, or any loans made by the business that
have more than a year left to run.
In the case of a longer term loan made by the
business, there will generally be two accounts, one in current assets to
reflect the loan payments that will be made in the current year, and one in
longer term assets for the repayments that will be made in more than a year’s
time.
Next Week – Liabilities. |
/