Balance Sheet Review

A Balance Sheet is a snapshot of a company’s financial position at a specific period.  Assets, liabilities, and equity are the components of a Balance Sheet. Assets are something you own that has value, such as bank accounts, accounts receivable, inventory, vehicles, equipment, buildings, or land. Liabilities on the other hand are something you owe to others, which includes accounts payable, loans, notes, payroll liabilities, and taxes. Equity is the money that has been put into the company by its owners and the profits the company has made.It is important to review your balance sheet on a regular basis for accuracy. Here are some key places to start:

Cash

This includes money in the bank and petty cash on hand.  Bank accounts should be reconciled every month. Review the bank reconciliation for outstanding checks or deposits that have not cleared.  There could be duplicate entries, or you might need to void a check and reissue.   Petty cash should also be reconciled to ensure all expenses paid with petty cash have been recorded and cash on hand matches what is reported on the Balance Sheet.

Accounts Receivable

 Also known as AR, this is money that is owed to you. If you invoice for products or services, this is the amount outstanding until you receive payment. When reviewing AR, you should run an AR Aging report. The total AR amount on the report should match what is reported on the Balance Sheet. Also, look at past-due account balances on the report to determine if there are any invoices that are uncollectible and need to be written off to bad debt. If there are any accounts with a credit balance determine if there is an overpayment that needs to be refunded to your customer or client.

Inventory

For businesses that sell products, physical inventory counts should be compared to the inventory account on the Balance Sheet.  If there are discrepancies, an adjusting journal entry should be recorded on the books. 

Fixed Assets

These are large dollar purchases, typically items over a designated threshold that should be recorded as an asset. Your general ledger should be reviewed for large-item purchases to ensure fixed sets are recorded properly and not expensed. Your asset list should also be reviewed quarterly to determine if there are items that are no longer owned or in use that need to be removed from the books.

Intercompany Loans

This is relevant for companies with multiple entities where one entity loans another entity money or pays a bill on their behalf. These loans or bills should be recorded as intercompany loans. If you adjust the loan amount on one entity the opposite entry should be made on the corresponding entity to ensure they match on both Balance Sheets.

Credit Cards

Credit card statements must be reconciled monthly, so all charges are recorded and applied to the correct general ledger accounts. If there are any outstanding charges that never cleared make sure they are not duplicate entries. 

Accounts Payable

 Also known as AP, this is what you owe for items or services you have received. When reviewing AP, you should run an AP Aging report to see what is outstanding. Review the vendor accounts to ensure no duplicate invoices were recorded. Vendors with a credit balance should be investigated further to determine if a refund should be requested. If bills are paid with a credit card be certain to apply the payment toward your bill so it will clear your AP balance.

Loans/Notes

 Loans and notes are monies that are borrowed from a bank, credit union, or individual that must be paid back over time. Required payments typically include principal and interest. Review the loan balance to verify the payments recorded principal and interest correctly. Request a loan activity statement periodically from the lender to verify the loan balance on your Balance Sheet matches the principal balance per the bank. 

Payroll Liabilities

This is the area on the Balance Sheet where payroll-related liabilities are reported. This includes payroll tax, group insurance, and retirement plan liabilities. The amount in payroll liabilities will vary throughout the month as payroll is incurred and payroll tax deposits are made. The payroll liability balance at the end of the month should match what is owed. Review your payroll liabilities monthly to ensure they are recorded to the correct accounts and no payroll tax payments have been missed.  

Accrued Taxes

Accrued taxes are taxes incurred in the current year but are not due until a future date. This could include franchise (margin) tax or property taxes. Many companies accrue large tax bills, so the expense is accounted for in the period that is covered with the tax and is reported as a liability on the Balance Sheet. For example, 2021 property tax is due January 2022, so taxes are accrued in 2021, and when it is time to pay the tax bill in 2022 the liability will be reduced. Review the accrual balance each year for adjustments needed, such as tax rate changes. Also, review the account to ensure the tax payment was applied to the accrued liability account and not duplicated as an expense on the Income Statement.

Sales Tax Payable

Sales tax is money collected on taxable items you sell. Sales tax is typically paid on a cash basis each month. Review account activity to ensure that “sales tax timely pay discounts” have been recorded. If transactions are properly recorded, the Sales Tax Payable on a cash basis Balance Sheet at the end of the month should match the sales tax for the month reported on the sales tax report that is filed. 

Equity

The equity section on the Balance Sheet is the cumulative profits or losses earned by the business since inception, less any dividends paid. At the end of the year, the net income or loss will be closed to equity. No transactions should be recorded to the equity account during the year unless there is a prior period adjustment. Equity should roll forward from year to year, so check the equity account balance to make sure it ties to the previous year’s final Balance Sheet.

Periodic reviews of the accounts reported on the Balance Sheet will provide all owners and stakeholders of a business with a clear and accurate financial standing, which is needed to make business decisions.