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Articles:Entering Fixed Assets as Journal Entries Estimating, Project Management Overview Paying Liabilities and Transfers Between Accounts Profits - Strategies to Improve |
The Balance Sheet, Part 4Balance Sheet AuditOn a regular basis (yearly, quarterly, or monthly) the company should review the company’s accounting information. A good accountant is a “Balance Sheet accountant”. What does that mean? Most contractors look at their Income Statement to determine profit. But unless the company can justify every number on the company’s Balance Sheet, the company’s Income Statement may be misleading. The Balance Sheet not only shows how the company’s business is doing financially, it also provides the company with the confidence that the company’s profit is real. The advantage of reviewing the company’s Balance Sheet is that each number on the company’s Balance Sheet can be tied to an outside document. Once the company has validated all of the company’s Assets and Liabilities, then by default the company’s profit figure is correct. The company may have accidentally charged a subcontract cost to office supplies, but the company can still be confident that the Net Profit number is accurate. Also, it is much easier to reconcile a loan balance to a bank document, rather than verify the total material expense for the year by going through all the company’s files and adding up all bills. This example shows the importance of performing a Balance Sheet audit: Not all errors will show more profit. Some will result in less profit. For example, at the beginning of many insurance policies, the company are usually required to pay a considerable down payment. The company’s bookkeeper may code that to a Prepaid Insurance Account. But what if the policy expired months ago and the company has never adjusted the money out of the prepaid account? When the company discovers this, the company will have to show additional expenses that may be related to income earned in prior years. Whatever the results of auditing the company’s Balance Sheet, the company will know that the company has accurate financial statements. These are statements that the company can use to secure loans, to forecast pay scales and bonuses, and budget for next year in advance. And best of all, these statements will show the company’s true profitability. Mission Development has a month-end or quarter-end review checklist will help the company perform an accurate Balance Sheet audit. The checklist covers (in the usual order of Balance Sheet accounts): Checking, Savings, or other bank accounts Once a Balance Sheet audit is done, your company will be more familiar with the Balance Sheet, the Income Statement, and how to most accurately review and analyze the various numbers that comprise the company’s important financial reports. Only when the company has a true and accurate picture of the company’s financial health can the company make the best decisions moving forward. While many peoples’ eyes blur at the mention of accounting, a good business person realizes that understanding the company’s own financial statements is vital to the company’s success. During the good times a financial understanding may not be as important, but during a poor or weakening economy, good financials and a sound understanding of the numbers can make or break a company. A final note: this series has focused on the Balance Sheet, as opposed to the Income Statement. The company cannot judge the accuracy of the profit and loss numbers unless the company performs a Balance Sheet audit. Once the company has justified the company’s net profit, the next step is to analyze the company’s Income Statement, which shows where the company is profitable and where there may be potential losses. Please contact me if you would like to learn more about instituting a comprehensive training process. Thank you, Andy King
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