Why Your Balance Sheet Should Balance

Why Your Balance Sheet Should Balance

 

A balance sheet is designed to list all assets, liabilities and shareholders’ equity of your company. But this information isn’t effective if the numbers don’t line up! Have you given up on the idea of getting your balance sheet to balance? Then, it might be time to bring in a financial expert to evaluate the numbers.

What does it Mean to Balance a Balance Sheet?

Look at your company’s liabilities, assets, and equity and see if these things balance to zero. If you generate a report and you don’t see a zero balance, then it means that there was probably an error in one or more transactions.

Keep in mind that the “double-entry” accounting principle is the reason that the sheet should balance. All transactions are recorded in at least two accounts, helping to serve as a check to ensure consistency in the entries. For example, if you spend $15,000 on a company car, then the asset account will increase by $15,000 to reflect the value of the vehicle. At the same time, your cash account will decrease in the same amount since the money was spent on the purchase of the car.

Cloud based accounting software
Cloud based accounting software

Most business use cloud-based software programs or apps to handle their double entry accounting. While these programs work great almost every time, they only ensure the numbers are correct. Software is a helpful tool if an experienced person is overseeing the numbers, but there is still a possibility that mistakes can happen. There are some technical errors that an inexperienced person would make in a balance sheet that need to be rectified by a financial professional.

What should you do if the balance sheet doesn’t balance to zero? Then it is a red flag that you need to do some investigative work to identify the problem. A small discrepancy can lead to a domino effect resulting in issues with other financial reports. Work through the transactions one at a time to find where the problems originated.

Things to Include on the Balance Sheet

Assets x Liabilities

Assets on the balance sheet should include everything that is owned by the company, including the measurable value that will be received in the future. Liabilities include costs that are owed by the company, including debts, salaries, payables, and taxes. Equity shows the retained earnings of the company, as well as capital that came from the shareholders.

Special Circumstances to Consider

It is important to review the balance sheet regularly, and there are a few times when an updated balance sheet is critical. For example, if you are doing any fundraising or going through a merger/acquisition, then you need to ensure that the numbers are accurate. Failing to balance the sheet before the merger or fundraiser makes it harder to balance the sheet after these events occur. Also, incorrect information on the balance sheet could be misleading to fundraising contributors or the company that is acquiring your business.

As a business owner, you shouldn’t be spending your valuable time working through these financial details. Instead, it is helpful to have an outsourced CFO who will make sure that the balance sheet is balanced. Contact us to learn more!

 

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