The end of the year approaches. Time to assess progress and get ready for a fresh start and new year. NOW is the time to clean up your accounting messes. Like being physically fit, fiscal fitness requires a bit of focus and discipline. The numbers may not be way off. So you and your accountant may be letting things slide. My encouragement: Clean it up. Commit to your fiscal fitness. Here are just a few reasons why…
- If the dollar amount is wrong, it may be way off in both directions. The net effect could be small but the data is unreliable. Better to trust every account, every dollar amount, on the reports.
- Someone may be pulling a fast one, counting on the fact that you don’t really know what the balances should be. This is how you get ripped off.
- Messy accounting is poor financial stewardship. It’s your money and your responsibility. Treat your assets respectfully if you want to grow them.
- When the books are right, your company is worth more when you go to sell it someday. Just saying.
So, here are some tips for fixing weird accounting entries…
- Comb through every account on your Balance Sheet. Assets are what you HAVE. Every account is verifiable. Your Cash account should reflect what you actually have in that checking account. You can verify it by reconciling the account with your bank statement. Your Accounts Receivable account should total the dollar amount that you have billed customers but not yet been paid for. You can add up the stack of entered by not yet paid invoices. Liabilities – what you OWE – can be verified by the loan statements or credit card statements. Equity is the difference between Assets and Liabilities. Each account should be right. If it isn’t right, you have to adjust it to right.
- Use Journal Entries – Debits and Credits – to get the balances right. Suppose the Asset account for Inventory says that you have $$75,000 in Inventory. But you counted your Inventory and your actually have $55,000 worth of stuff on the shelves and in the trucks. Credit Inventory $20,000 and Debit COGS Materials $20,000.
- The fix gets a little trickier if it involves a “linked” account. For instance, if your AR balance reflects a weird balances, you can’t use a Journal Entry to fix AR. You have to find the customer account that is creating the weird balance. Make an adjustment to the customer’s account…to make it right. If they customer doesn’t owe you anything, adjust the account to zero. Code the entry to Sales or an expense called Adjustment. Leave lots of notes in the description fields. If the discrepancy is less than $1000, and has been hanging around your reports for 10 years, make the fix. Bottom line, the accounts have to be right.
- Run the Balance Sheet before and after the fix. Look for the effect, the Debit and Credit, of your adjustment. Verify…are the accounts right? Bit by bit, clean it up.
- Then, write procedures to make sure the data is being entered properly. Most importantly, starting now, review the Balance Sheet weekly so you find and fix mistakes quickl