With spring now here, it’s natural to start thinking about doing some spring cleaning. But don’t limit the cleanup effort to your house — your business's accounting system and general ledger needs cleaning, too! Here are five areas of your financial statements that may be due for a spring cleaning:
Inaccurate inventory on your balance sheet can have grave consequences. If your balance sheet shows more inventory than you actually have, you may not be able to fulfill orders and risk losing business. If your balance sheet shows less inventory than you have on hand, you might procure more inventory than you need. In both cases, you run the risk of having inventory you can’t sell.
Action: Perform a physical count and reconcile the amount against the inventory value on your general ledger. Conduct the necessary research and make the required adjusting entry to tie out your salable inventory value. If you have moved that inventory 3 times to get it out of the way, figure out a plan to get rid of it and turn it to cash, a donation or scrap.
In an ideal world, you provide a good or a service to your satisfied customer, who then pays you within an agreed-upon timeframe. Unfortunately, invoices get lost, priorities get shuffled, or a customer's payable contact leaves for another job. An open invoice could also simply be the result of a mistake.
Action: Now is a great time to get your accounts receivable ledger in order by running an aging report that highlights outstanding receivables that are past due. Focus on getting clients to pay these past-due invoices, clear up any misunderstanding, or send the bills out to be professionally collected. If you have salespeople, put a reduction in the commission plan if balances are not collected within 60 or 90 days. Salespeople can be great collectors when they have a financial interest!
It's easy to leave old fixed assets on your balance sheet after they’ve been disposed. Doing this can create a whole host of problems, including an understatement of net income, tax compliance issues, and an inaccurate business valuation. State sales tax agencies also like to look through your fixed asset listing to see if you failed to properly pay use tax.
Action: Audit your fixed assets listing in the same way you make a physical count of your inventory. If you have not already done so, create asset tags and build a new fixed asset subledger. Remove any obsolete or sold/disposed assets from your balance sheet. Also consider documenting your fixed assets with a photo or video camera, and send copies to your insurance company for their records. Photos can also be a great way to document an equipment's serial number.
Liabilities & Loan Accounts
All loans have two components: principal and interest. A portion of every payment goes to pay down the principal on the balance sheet and a portion goes to paying interest expense. These principal and interest amounts change every month based on the loan's amortization schedule. The most common mistake when recording your loan payments is assigning the entire monthly payment to EITHER principal OR interest expense.
Action: Conduct a timely reconciliation of balances per your loan statements to the value on your books.
Properly accounting for paychecks can be complicated. For example, gross payroll amounts and payroll taxes hit your income statement as an expense while employee tax withholdings go on your balance sheet until they are remitted to the appropriate taxing authority. Add in benefits and other taxes and you could have a mess.
Action: Periodically review your payroll entries against your payroll account. If you have not already done so, set up a separate payroll bank account and ask for help to audit or run your payroll for you.
Taking the time now to review these key accounts will ensure accurate financial statements and make future period closing activities easier to handle.