Monthly Accounting: HART’s Balance Sheet Approach

Monthly Accounting: HART’s Balance Sheet Approach

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When I am preparing monthly financial statements, I often ask myself and my client the following question ..

How Accurate Do You Really Need Your Monthly Financial Statements To Be?

It’s all relative – Keep that in mind!

As long as your monthly statements are consistently prepared and reasonably accurate, you should be able to better manage your business. You have to draw the line somewhere. Should you be spending extra time and money trying to get Last January’s monthly financial statements to be 100% accurate and perfect? If it’s November and the month is almost over – you should have already been looking at your October monthlies by now.

It takes time to look at every transaction during the month, and time is money.

I would rather you be comfortable knowing that your bottom line .. your “Net Income” .. is correct. Yes – there may be times when your repairs and maintenance expense might look to be too high, and your equipment repairs seem to be too low. Yes – it’s possible there are errors in the coding of your statement by your bookkeeper (or accountant) and your advertising dollars spent to an weird name (not coded on your cheque-stub) was posted to purchases or office supplies … but these reclassifications can be posted anytime .. and certain will be done .. before your Year-End is finalized. Just let me know if you remember any thing unusual.

Of course – not everybody really needs monthly financial information, or can afford it. Usually when you have the opportunity to provide monthly financial statements .. you should at least try to focus on one major aspect of the client’s business. For instance .. for some clients – cash outflow and where the cash is being spent might be the most important thing to the client. For other clients – cash collections and accounts receivable lists might be the most important thing. For others .. inventory flow and control might be the most important aspect of paying someone like me to provide them with monthly financial information. Knowing how the business is doing – profit-wise – might just be an added bonus. I say a bonus, because I’ve found that most owner/managers really do know (deep down) how their business is going.

So – I like to find a comfort zone in the amount of work that I will perform each month on a month-to-month basis and follow it. If there are adjustments, or mistakes, or reclassifications needed – I will just fix it in the following month (unless it’s a year-end month). In order to do this .. I have a routine .. and follow the Balance Sheet Approach of when preparing monthly financial statements.

For proper disclaimers to be in place – please keep in mind that this is basically how HART does it – and check out my Disclaimers page.

Monthly Accounting: The Balance Sheet Approach

Generally speaking … if everything on your Balance Sheet is reconciled and correct .. then your Net Income in your Equity section MUST also be correct – if you are to be in balance.

Specifically speaking .. I work to reconcile and backup all the major accounts on the balance sheet (almost like a mini-year end) and that something the client yearns for (receivable list, inventory control, cash flow, compliance reporting, etc) and if I know the bottom line is correct – I don’t spend the time reviewing the details that make up their profit and loss.

Now – I do look at the statements and will not give faulty or statements that I know is in error to my clients. I just won’t hunt or spend any time to see if there are errors. Usually my instincts are correct – when something sticks out like a sore thumb – I seem to recognize that.

NOTE: I keep photocopied records of all stuff typical like: bank statements, insurance premium invoices, all asset additions, all government compliance reporting, summaries created (MLCC liquor purchases, ceridian summary journal entries, summary daily cash receipts, summary daily cash disbursements, online reports obtained and printed out, receivable lists, payable lists, loan statement balances, etc etc.)

For clients preparing inhouse monthly financial statements .. I just recommend attaching a printout or reconciliation directly to the source bank statement, etc so you know it has been looked at, and can be tied into the monthly statements. No sense wasting extra paper!

ASSETS

CASH ACCOUNTS

* All bank accounts have to be reconciled on a monthly basis every month. This means all chequing and savings accounts and keeping track of a list of outstanding cheques and deposits. Usually, I might forego the bank deposits and record them as per the bank statement through a cash clearing account – when there are other aspects involved in the reconciliation. For instance, debit cards, ATM deposits, AMEX deposits, VISA and Mastercard deposits, Diner deposits, etc. For each of these type of accounts – I go directly to the online reports (moneris, datawest, chase, directcash, etc) and reconcile the deposits outstanding that have been made and not yet deposited into the company’s bank account.

* For foreign exchange transactions, I will adjust the month-end G/L balances to an income “foreign exchange gain/loss” account based on the month-end exchange rate.

ONLINE BANKING AND ACCOUNTING IN THE CLOUD

* It’s great that current software programs (like Quickbooks Online, Xero, etc) can actually fetch all of your bank statement transactions for you and retrieve them into your accounting data. You just have to keep in mind, that if you think it is a “set and forget” you might be in a shock at the end of the year if you had changed all your passwords and broke the connection. Yet, even if you have a stable retrieval of all your transactions, these entries may have been imported into your accounting program, but until you actually review and ADD them to the accounting data they are more or less just sitting there, and not included in your financial statements.

* Online and cloud accounting will be discussed in other articles so I will not discuss any more details and tips in this post. However, if you are reconciling your bank and cash accounts, by default this also means to the balances you reflect in your accounting data, and includes reconciliations made online within any desktop or cloud accounting software program.

ACCOUNTS RECEIVABLE

* If my monthly financial statements are generating information to maintain the receivables, it is reconciled every month. Otherwise, I usually just reverse last month’s list and setup this month’s list. Only at Year-End will I scrutinize the list, if I do that at all. The list is prepared by the client.

PREPAID EXPENSES

* I am quite conscious of items that could be paid that might extend more than one accounting period and more than one year. So, I try to obtain the invoice for any premiums that are .. insurance, autopac, workers compensation, property taxes, business taxes, subscriptions, etc. My accounting program allows for recurring and reversing journal entries. I normally just setup the entire e.g. insurance payment to prepaid expense (or accounts payable) and then expense it every month 1/12th as a recurring journal entry so I don’t have to actually repost an adjustment every month.

INVENTORIES

* If the client has monthly or quarterly inventory lists .. I will reverse last month’s and setup the current months’ lists. The opening inventory on the income statement is unchanged (being last year end’s figure) and this ‘setup and reversal’ will go to the closing inventory on the income statement. If there are multiple departments and divisions .. I try to indicate to myself whether the monthly transfers, etc .. are correct or if there’s something to do in the future. Generally, if the the TOTAL gross profits seems reasonable after adjustments, I’m less concerned with this during the monthlies.

FIXED ASSETS

* And, yes – it’s “Fixed” assets again and “Depreciation” .. not Capital Assets and Amortization … / If a new asset is purchased – I obtain copies of the invoice for my year end file and keep it at the top of the monthly file. It varies between some of my clients how I present these new additions. Sometimes I just post everything to a “Current Additions” account on the balance sheet, while most of the time I post it properly to its proper account .. F+F, Auto, etc.

LIABILITIES

ACCOUNTS PAYABLE

* For accounts payable there are three ways that I do this. Sometimes I keep an excel spreadsheet of the opening list of accounts payable, and then I look at the cheque stubs and see what is being paid. I would apply them against that list. And, when the client provides me a list of Accounts Payable – I would set that up. Other times, (my preference) is just code all the cheques as if it’s paid COD – directly to the expenses. At the end of the month a list is prepared and I reverse last month’s list and setup this month’s list. The third way to do it .. is for those clients that pay off everything every month anyway .. just code all the unpaid bills at the end of month and there are no accounts payable, just outstanding cheques. At the year end, I would reclass these outstanding cheques to accounts payable though, paid in the following month, as well as watch for future payments subsequent to the year end to be included in the Accounts Payable listing at the year end.

* For compliance reporting – I like to obtain a copy of the filing copy of PST returns, GST returns and other monthly reporting that was made. I keep a file for each of these anyway – and I usually ask for it anyway when I perform a year end – the client may as well give that to me during the monthlies.

LOANS, MORTGAGES, LINES OF CREDIT, ETC

* All loans are adjusted to known bank statements and loan balances – if known – for interest. If I can’t get confirmation each month, I just use TValue3 amortization program and estimate the interest each month.

SHAREHOLDER LOANS

* Usually, when the shareholder has a personal debit card that is in the company’s bank account name .. you will see lots of withdrawals for non-business activities. When in doubt, I charge the shareholder for unusual items .. and will print it out and keep a copy of the G/L for the shareholder/owners at the top of the file – to remind me what is DEFINATELY personal .. and what could be deductible for business. It takes two seconds to ask the owner/client in a phone call what certain expenses are all about and, to remind him that if something is personal – code the cheques that way.

EQUITY

SHARE CAPITAL

* Usually, this rarely changes in corporate structures unless there is a restructure. If a shareholder sells their shares, it doesn’t affect the share capital of a corporation – it’s a change in control issue and possibly creates a new year end cut-off.

RETAINED EARNINGS (DEFICIT) / PROPRIETOR’s CAPITAL

* The change between last month’s retained earnings and this month’s retained earnings is the current earnings. If I am comfortable that everything else above this section is correct – this figure will have to – by default – be correct as well .. otherwise the Balance Sheet wouldn’t balance.

ADDENDUM

Of course, each client has many accounts in their chart of accounts and with computerized accounting systems, you can always add as many new accounts as you want. I often do that. If there are somethings posted in receivables that I’m not really sure if they are receivables or personal loans or payments received without being invoiced, etc etc … I will segregate these type of entries into either Suspense accounts or Miscellaneous accounts. I will just separate it but not confirm or reconcile it or let it prevent me from completing the monthly financial statements on a timely basis. Sometimes I will. Each situation is unique.

So, in conclusion .. I could restate .. that provided MOST of the accounts are reconciled on the balance sheet .. the Net Income will MOSTLY be correct, in MOST cases.

One things for sure – keeping track of monthly stuff monthly, rather than trying to figure it out at the year end – saves me time and time is money.

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