By: Ryan Renner, Eide Bailly LLP
As tax season grows closer and closer, it’s time to start looking at your books so you know where your business stands. Maybe you look at your books often (good for you!), or maybe they’ve gotten a little dusty since last tax season. Either way, getting a head start and looking at your books now can help make sure there are no hidden surprises ready to jump out at you. In fact, there are some warning signs that could mean something is wrong.
Arguably the most obvious warning sign is that cash no longer reconciles to your bank account. This mistake can usually be fixed by reviewing your account activity, starting from the last time your cash was in balance and working through your current period end. However, if you are completing a monthly or annual bank reconciliation and have significant unexplained differences, there’s a good chance something went wrong with the bookkeeping. It’s a never a good idea to let these – or any other – differences go, as they can continue to grow. Then you’ll have a real hole to dig your way out of.
Balance Sheet Blunders
Another obvious alert – but one that we see happen more often than you would think – is that the balance sheet no longer balances. When your balance sheet isn’t in balance, your business can also end up unbalanced, which can cause some serious issues for your business.
Most accounting software will usually not allow you to maintain an unbalanced balance sheet, or will provide you an alert that something you did will cause an imbalance. If you start getting these alerts or notice things aren’t balancing, it’s best to look at what could have caused the error and how to fix it before entering it into the balance sheet. Taking the time to figure out what went wrong right away will save you time and headaches in the future.
Any time you record a manual adjustment to an equity account, besides normal equity transactions like owner contributions and distributions, something might not be quite right. Only in rare instances, such as correcting an accounting error, should you make manual adjustments to equity. In fact, you should consider if the adjustment would make more sense to be recorded within your income statement, rather than to your equity account. If you do find yourself making a lot of manual adjustments to your equity accounts, it may be time to discuss with a professional.
Looking at your balance sheet account reconciliations can be another helpful way to see if there is anything wrong on the books. A couple items to look for in your account reconciliations include:
- Account reconciliation detail doesn’t agree to the balance sheet amount
- Similar to the bank reconciliation, if your account detail – such as accounts receivable and accounts payable detail – doesn’t agree with your balance sheet, it may indicate a problem with the reconciliation process. A detailed review of your account records can help you identify which difference needs to be corrected. (If you need a refresher on accounts payable and accounts receivable, look here).
- Negative balances in your account reconciliation detail
- While this may happen occasionally and not be an issue, there can be times when this indicates a problem. For example, if a customer has a significant negative accounts receivable balance, do you actually owe that customer a refund or was something entered incorrectly? On the other hand, if you have a negative accounts payable balance from one of your vendors, are you really expecting a refund or does that indicate an error with payment?
The Moral of the Story…
It’s safe to say you should never underestimate the power of the balance sheet when you are looking at your books. When things go wrong on the books, you can often look to the balance sheet (or these other areas) to see where those pesky problems are coming from. If you can catch these errors soon enough, you can get your business back in shape before tax season. Your business – and your CPAs – will thank you.