Accounting For You
|Posted on 5 October, 2014 at 23:11||comments ()|
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:
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.
|Posted on 29 September, 2014 at 1:14||comments ()|
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:
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:
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):
Current Period Transactions
The next thing to do is to create the current period reconciliation, working down the remaining transactions in order:
Accrual balance of Accountant Invoice -100.00
Accrual of Legal Fee - 50.00
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.
|Posted on 21 September, 2014 at 23:39||comments ()|
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 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.
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.
|Posted on 14 September, 2014 at 21:32||comments ()|
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.
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.
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.
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.
|Posted on 7 September, 2014 at 21:58||comments ()|
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.
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 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 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
|Posted on 31 August, 2014 at 21:42||comments ()|
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.
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 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.
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 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 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.