Rules
Part of A balance sheet is a single date, not a period, and that changes everything
Loans that never shrink and stock nobody counted: balance sheet errors
Nine balance sheet mistakes and their corrections, from loans that never reduce to stock nobody counted, plus the monthly list that prevents most of them.
Balance sheet errors are quieter than profit errors. A profit figure that is wrong provokes an argument. A balance sheet line that is wrong sits there for years, balancing perfectly, until somebody applies for finance or an accountant asks what an account is for.
Nine of them are set out below, each with what produces it and what the correction looks like. They are ordered roughly by how long they usually survive undetected. Every figure is invented.
What to take away
- The statement balances whether or not it is right, so nothing about it being in balance should reassure anyone.
- Most of these errors come from a payment being recorded as a cost when it should have moved a balance sheet line, or the reverse.
- The single fix that prevents most of them is a monthly agreement of each balance to a document from outside the ledger.
1. A loan that never goes down
Repayments are coded entirely to a cost account, so the liability stays at the amount originally borrowed while the business pays it off.
Effect: liabilities overstated, costs overstated, and a business that looks more indebted than it is. Correction: split each repayment into interest and principal from the lender's schedule, and post the principal against the loan. Then agree the loan balance to the lender's statement every month, forever.
2. Stock that was never counted
The stock figure carried forward from the last time somebody counted, which was some years ago.
Effect: an asset of unknown accuracy and a cost of sales figure set to make the books add up. Every gross margin in between is fiction.
Correction: count, value at cost, adjust. The difference goes to cost of sales in the period of the count, and the profit and loss statement for that period should say so.
3. Tax control accounts nobody reconciles
Sales tax collected, payroll deductions, or any amount held on behalf of an authority, accumulating in an account that has never been agreed to a return.
Effect: the business does not know what it owes, and the number is usually understated. Correction: reconcile each control account to the filed return each period, then clear the difference before it compounds.
Which returns a business owes, and how often, follows from how it is set up, which the public guidance on paying business taxes outlines. If the balance has drifted over years, hand it to an accountant rather than patch it.
4. A suspense account with a permanent balance
Something did not reconcile, it was posted to suspense so the month could close, and it stayed.
Effect: an unanswered question sitting on the statement, usually representing a real error somewhere else. Correction: set a rule with a number in it. Nothing sits in suspense past one month end, and the account is looked at on the same day each month.
5. Accruals and prepayments that roll forward untouched
An accrual set up two years ago for an invoice that eventually arrived, never reversed. A prepayment for a policy that was canceled, still releasing.
Effect: small, persistent distortions in both statements, and a schedule nobody trusts. Correction: keep one schedule listing every accrual and prepayment with what it is for and when it ends, and reconcile the schedule to the account balance monthly. Anything on the schedule nobody can explain gets cleared.
6. Owner transactions mixed with trading balances
Money the owner put in, took out, or paid for personally, landing in receivables, payables or a general expense account.
Effect: receivables and payables that do not agree to the customer and supplier ledgers, and an equity figure that means nothing.
Correction: one account for amounts owed to or from the owner, used for nothing else, agreed with the owner at least yearly.
Where and how the owner should be paid at all is a question for an accountant, depending on the legal form of the business.
7. Equipment charged straight to costs, or never removed
Purchases that will last for years charged to an expense account, or an asset register that still lists a van sold in a previous year.
Effect: assets understated in the first case, overstated in the second, and in both cases a register that cannot be agreed to anything. Correction: hold an asset register listing each item with its cost and date, agree it to the balance sheet yearly, and remove disposals when they happen.
The federal guide to business expense resources sets the line between something used up and something bought to keep. Read it before setting your own threshold.
The accountant owns the policy for what gets capitalized. The expense recording guide covers the cost side of that same decision.
8. Customer deposits treated as income
Money taken in advance for work not yet done, recorded as a sale.
Effect: revenue overstated, a liability missing, and a profit figure that includes work still owed. Correction: hold the deposit as a liability until the work is invoiced, then apply it. The timing rule underneath this is the subject of the revenue recording guide.
9. Control accounts that do not agree to their ledgers
The receivables total on the balance sheet does not equal the sum of customer balances, usually because a journal was posted straight to the control account.
Effect: two versions of what customers owe, and no way to tell which is right. Correction: agree both control accounts every month end and investigate any difference before closing. Posting rights to control accounts should be restricted so that this cannot happen quietly, which the accounts receivable guide covers from the process side.
The monthly list that prevents eight of the nine
| Balance | Agreed to | Takes |
|---|---|---|
| Bank | Bank statement | Minutes |
| Receivables | Customer ledger total | Minutes |
| Payables | Supplier ledger total, plus statements | Under an hour |
| Loans | Lender's balance | Minutes |
| Tax controls | The period's return | Under an hour |
| Accruals and prepayments | The schedule | Minutes |
| Suspense | Must be nil | Seconds |
Stock is the exception, since it needs a count. Everything else on the list is a comparison between two numbers that already exist, and the routine fits inside a morning. It belongs to the closing sequence described in the bookkeeping foundations guide.
