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Accounting and Bookkeeping for Small Businesses and Sole Traders
Chartered Management Accountant, Certified Practising Accountant
and Registered Tax Agent
My Blog
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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. |
Categories: Balance Sheet
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