Know What’s On Your Balance Sheet
In order to properly close your financial books each month, it is critical that you are confident in the validity of the assets and liabilities reflected on your company’s balance sheet.
The last thing you want are unsupported assets or unrecognized liabilities on your balance sheet that will affect your future operating results!
We will refer to the various balance sheet account reconciliations Excel templates that we offer on this site and that are specifically built (with sample data) to show the best way to explain the balances and activity by type of balance sheet account.
Several balance sheet accounts are best supported by sub-ledger reports. Sub-ledger are defined as such since they provide support to the General Ledger. Some examples of sub-ledger reports (that we will discuss below) are; Inventory Listings, Accounts Receivable Agings/Listings and Accounts Payable Agings/Listings.
Here is a list of actions to take each month as part of your month-end close to control your balance sheet:
All bank accounts must be reconciled to the penny.
Account reconciliations should be completed for all other balance sheet accounts such as:
Accounts Receivable
Inventory
Prepaid Assets
Notes Receivable
Accounts Payable
Accrued Payroll
Accrued Expenses
Notes Payable
Deferred Rent
Let’s review each of these components of the balance sheet and the best way to reconcile and confirm them each month:
Bank Reconciliations -
Each month, the bank statement for each bank account should be reconciled to your accounting general ledger (GL)
The ending bank balance will typically differ from your GL due to:
Uncleared checks
Deposits in transit
Bank service fees
You can use this form to assist you with completing your bank reconciliation each month: Bank Reconciliation Form
Accounts Receivable (AR) -
AR Aging Report - The best support for your AR on the balance sheet is your underlying system’s AR Aging Report that shows the detail of invoices or billings that are still yet to be received from your customers. The aging columns are important as the older the receivable, the less valid it could be. Make sure that your billing system is maintained and updated with customer payments so that this report will be useful and will tie to your GL. If it does not tie to the GL but is correct, you will need to “write-down” (reduce) or “write-up” (increase) your AR on the GL.
Open Invoice Listing - Similar to the AR aging but does not have “days aged” columns and is just a raw list of open and unpaid invoices you have sent to customers.
AR Allowance - This account is a contra-asset to the AR account and is where you will accrue a reduction to your AR value for bad debt reserves or collection issues. This allowance can be very challenging during your annual financial audit as the auditors will want to see that this reserve is properly accrued based on actual and appropriate collection history for your company.
Inventory -
Tracking your inventory - If you sell products or keep track of other supplies, it is critical that you have a system that keeps track of this inventory.
Inventory stock listing - this is simply a listing at any point in time that your software system shows you have on hand by SKU (Stock Keeping Unit), quantity and value. You should run this report at the end of each month to see how it ties to you GL. If your inventory listing does not tie to your GL, it is primarily due to the following reasons:
Poor inventory system use - If your company is not keeping your inventory system up to date, the report will not tie to your GL.
Input errors - Incorrect or incomplete input of sales or receipts of inventory items will cause the report to go out of whack.
Untimely entry - If inventory depletions (sales or adjustments) and/or additions (purchases or adjustments) are not recorded in a timely fashion and certainly if not recorded in the same period that these activities affect the GL, your inventory reports will not tie to your GL.
Shrinkage - This is a nice way of saying, “theft” or inventory “loss” due to improper security or control. One of the primary purposes of inventory reconciliation is to make sure you are not losing inventory due to these types of issues.
Prepaid Assets -
These are common items such as prepaid expenses that relate to a certain period of time. For instance, prepaid insurance comes into existence when you have paid for the full year’s insurance premium all at once and now you need to debit the prepaid insurance account on the balance sheet and then amortize out 1/12th of the amount each month over the next year (premium year period).
Notes Receivable -
These are typically advances to owners or key employees in which there is a principal and interest portion to the payments received from them.
See our amortization table worksheet to show how to support notes receivable while also calculating the interest the company has earned on these advances. Click here for our amortization table.
Accounts Payable -
AP Aging Report - AP is very similar to AR but on the liability side of the balance sheet. Typically, the best way to support the GL balance of AP is to review the AP Aging Report from your payable system that shows the detailed list of vendor payables grouped by their due dates to see how much is past due and by how many days. Reports like the AP or AR aging are considered to be sub-ledger reports that support the general ledger.
If your AP balance on the GL does not tie to your AP detailed report, you need to look into why. The Accounts Payable (AP) account on the GL should typically not be accessed via manual journal entries but only via automatic entries to the payable system. This way, it should always tie out to the AP system. If your AP account on the GL does not match to the AP sub-ledger (after previously matching in the prior month-end) check the following:
Manual entries to AP on GL - confirm none of these were done.
Interface to AP system - Is your GL link to your AP system working or does it need an update?
Void items in AP - Sometimes a voided item in the AP module will not communicate properly back to the AP GL account.
Other entries - Was there a voided check run that never got reversed on the GL side so it is still reducing your AP account even though the AP system reversed the payments?
Accrued Payroll -
Common accrued payroll balances are:
Payroll payable - from end of month payroll accrual
Vacation payable
Bonus payable
Commission payable
Payroll system reports - The best sub-ledger for accrued payroll items should come from your payroll system. For instance, your vacation liability should be tracked in your payroll system as it needs to be accurate in that system so that your employees can see what their vacation balance is. The first step is to make sure that the vacation hours payable by employee is correct in that payroll system. Once that is correct, you can run a report by employee that supports the vacation payable which you can print and provide as support to the GL. You will need to adjust your GL to match this report once you confirm that this is your accurate vacation payable.
Accrued Expenses -
There are many types of accrued expenses. Many times this account is used for month-end vendor invoices that arrive after the AP system has been closed so the expense needs to be booked in the month it occurred and reversed in the next month when it will be physically booked in the AP system. Examples, would be late inventory, utility, services or other vendor invoices.
Recurring accruals - This account is also used for recurring estimated accruals that allow the accountant to properly accrue costs throughout the year to properly expense them in the right period. Accrued worker’s compensation insurance is a good example. This insurance is typically audited at the end of the policy year so the actual incurred expense needs to be accrued in the month the payroll was paid with an accrued Work Comp. liability building up on the balance sheet. Click here for our accrued liabilities template.
Notes Payable -
Similar to notes receivable (but a liability) the notes payable account is best reconciled via a note amortization table or tables. These tables will show the remaining principal liability at the end of each period while assisting you with the interest charge on the payments each month. Our template also includes the current vs. long term liability related to your notes. The current portion is the principal amount due over the next 12 months and the long term portion (to be classified as a long-term liability on your balance sheet) is any principal due beyond 12 months.
Deferred Rent -
Deferred rent is the offsetting liability account you book to when you are booking normalized (flat-line) rent over the life of a lease.
To normalize rent, you take the full expected rent on a facility over the life of the lease (including rent increases) and divide the total rent by the total months. Your normalized rent is this average rent. You use the deferred rent account on the balance sheet to book the difference between the current rental payment to the lessor vs. the average rent you are expensing each month.
Our deferred rent template will help you support this balance sheet account once you input your lease information into the template.
Other Liabilities -
There is typically an “other current liabilities” account for short term liabilities (due within 12 months) and “Other Liabilities” account for long term (due beyond 12 months) for various liabilities or obligations that do not fit into any of the other liability types.
Examples would be royalty obligation accruals and warranty accruals.
Equity -
The equity section is typically one of the easier reconciliations as these items tend to be very defined and do not contain as many transactions as the other accounts.
Account examples are:
Paid in capital - Funds invested into the company.
Distributions - Funds paid out to owners.
Stock accounts - booked when shares are issued or purchased back.
Retained Earnings - this is the account that captures the ongoing net income or loss from the income statement that build-up (or down) in this account.
Conclusion
To sum things up, it is critical that the accounting leader is well aware of the validity of the company’s balance sheet each month so that all assets and liabilities of the entity are properly presented. If this information is not maintained every month, it would be very hard to trust the income statement of the entity as it would be very possibly missing important accruals, expenses and possibly even accrued income.