4 Common Balance Sheet Issues And The Steps To Prevent Them
Businesses owners, both new and experienced, are bound to make mistakes from time to time, which is more so for the former who has yet to learn the ropes. And while errors should not be seen negatively since they serve as the stepping stone for growth, there are some instances where minimising them is for the best, such as in business accounting and its tools. Specifically, we will look over the common mistakes that may arise when creating a balance sheet and how to look out for and prevent them from occurring. At Onestop, we are here to provide you with the best auditing services in Singapore!
A Balance Sheet Explained
Before going into detail about these problems, it is best to review what a balance sheet is and what it does.
A balance sheet is essentially a financial statement that helps track a company’s progress and is comprised of three parts, namely:
- Assets (what the business owns)
- Liabilities (what it owes), and
- Equity (the leftover money after subtracting all expenses)
The assets must ideally be equivalent to the business’s total liabilities and total equity on a business balance sheet. Otherwise, the balance sheet does not ‘balance’ out, and it either means there is some mistake, or the company’s financial standing is in the negatives.
A simple formula to always keep in mind when dealing with balance sheets is:
Assets = Liabilities + Equity
An up-to-date balance sheet is the best way to gauge a company’s current and future health. If it comes with many errors or is not entirely accurate, it will not have the good results to make critical business decisions.
4 Balance Sheet Mistakes To Be Aware Of
1. Recording inaccurate transactions
A critical mistake that all business owners are at risk of is incorrectly recording business transactions and inverting numbers also called transposition errors. This accounting error happens when digits, such as those inputted in number fields like expenses, are recorded incorrectly.
Such errors generally occur when manually recording a long sequence of numbers on a balance sheet, and it can still happen even to experienced bookkeepers and business owners. Avoiding this can be achieved by simply double or triple-checking your work before inputting it on the balance sheet. Moreover, having someone else cross-check the transactions afterwards may eliminate these mistakes.
2. Omitting transactions
Instead of recording transactions incorrectly, there may be times when recording them on the balance sheet slips your mind. Thankfully, this common mistake is far easier to fix and relatively fuss-free to deal with.
Forgetting to record things like petty cash, supplies, inventory, and any other expenses is sure to throw off the rest of the balance sheet and result in an inaccurate financial outlook that could lead to unavoidable problems. One way to prevent this simple issue is by setting reminders to regularly record transactions, such as daily, weekly, or monthly.
3. Forgetting or neglecting to record inventory changes
Besides recording transactions, inventory changes are something that business owners must also consider. While counting and changing inventory in the system is straightforward, some businesses may often forget to update and tally up their inventory levels after each period. The best deterrent for this is to keep inventory updated as much as possible to ensure accuracy in the business’s records and when creating a balance sheet.
4. Improperly classifying data
Although it may sound simple, the importance of adequately classifying each transaction as either asset or liability cannot be stressed enough. To briefly recap, assets can be a physical or non-physical business property that adds value to an organisation. Examples include business hardware like laptops and desktops, real estate, and trademarks. A few asset accounts have inventory, accounts receivable, and petty cash.
On the other hand, liabilities are the current debts a business owes to entities like other companies, vendors, suppliers, government agencies, and more. More debts equate to higher liabilities. Liabilities can be short-term or long-term, including invoices, loans, supplies, and mortgages. A few liability accounts include accounts payable, accrued expenses, and unearned revenue.
All in all, assets and liabilities should clearly be understood and classified within a balance sheet. Thus, before recording transactions, make sure that you put them under the correct account. Consider double-checking with a professional like an accountant if you are ever uncertain about how to classify a transaction.
Tips On How To Prevent These Mistakes
Preventing these common mistakes starts by actively looking for red flags on your balance sheet to catch errors and prevent them from snowballing out of control. Below are some tips to better avoid these balance sheet errors:
- l Conduct a trial balance before making the balance sheet
- l Review balance sheet transactions regularly
- l Pinpoint problems as soon as possible
- l Keep the business’s financial records organised
Being organised is the best way to avoid errors regarding balance sheets. Besides that, being proactive is possible and maintaining detailed and accurate financial records for reference is the best thing a business can do. And while mistakes are inevitable, having a plan to track them down helps keep more significant balance sheet issues from arising in the future.
If you are struggling to stay on top of your business’s accounting needs, we at OneStop Professional Services can lend a hand. As a one-stop shop for all your corporate needs, don’t hesitate to get in touch with us to learn more about our services such as accounting, taxation, financial outsourcing, corporate secretary services, and company incorporation in Singapore.