Balance Sheet – The Black Swan of Accounting?

My clients ask me on a regular basis, “if there is one thing we should do correctly, what should it be?” My answer is easy (although a slight cheat as it’s much more than one thing), “make sure your Balance Sheet is correct”.

This answer is somewhat complicated and sends most business owners into a frenzy, as the Balance Sheet is often overlooked in favour of the “sexier” Income Statement. Despite this misconception, the truth is, that unless you have complete control over your balance sheet, you won’t be able to rely on the Income Statement for your business decisions or as a record of profit.

The inevitable follow up question ensues “How do I do that?”. Luckily, if you have an accounting team, you can put the onus onto them to provide you with the correct support for all the Balance Sheet balances. As a business owner, or manager, when you are presented with financials, you should also receive supporting schedules for each balance sheet account and be able to satisfy yourself that those balances are relevant and accurate.

The aim of each supporting schedule is to set out exactly what each balance is made up of. Luckily, there are standard schedules for most of the balance sheet accounts, and for all others, a schedule can be easily created. The most common schedules are:

• Bank and Credit Card Reconciliations (also making sure any unreconciled items have been attended to)
• Fixed Asset Register
• Prepayments
• List of Deposits held by you, or by a service provider
• Loans is incorporated as per relevant agreement
• Deferred Revenue
• Accounts Receivables?
• Accounts Payables?

A golden rule of accounting is that there should not be any accounts values on your balance sheet which you are unable to substantiate. It’s the first place we start when conducting an evaluation of any accounts and look no further until we can satisfy ourselves that the contents are accurate.