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How much money did you make last year? That’s what a lot of business owners want to know right now—and for good reason.
As a bookkeeper, my answer when you ask me how much money you made will often be, “You’re asking the wrong question.”
Instead, the first question you ask should be: Is the accounting balance sheet accurate?
If your accounting balance sheet is not accurate, then your profit and loss is worthless. And by worthless, I mean, literally worthless. Whatever your profit and loss says you made this year is completely unreliable if your accounting balance sheet isn’t complete and accurate.
You make 5 “management assertions” when you present financial statements to someone:
1. Accuracy: Are all transactions recorded, and without errors?
2. Classification: Is everything coded to the correct accounts?
3. Completeness: Is anything missing/unrecorded?
4. Cutoff: Is everything recorded in the right period?
5. Occurrence: Did the transactions that were recorded actually take place?
I cannot tell you how much money you made until I’ve confirmed all of the above, and that requires a thorough review of your accounting balance sheet.
Your Accounting Balance Sheet is a snapshot. It’s a moment in time, and it answers 1 simple question at its foundation….
Isn’t that a better question than how much money you made? You can make $1 million, and then you can spend $1.5 million and your company isn’t worth squat. I have no idea what “squat” is actually worth. In this case, I suppose it’s $500,000.
The balance sheet is broken up into 3 parts:
1. Assets: The things you own or have rights to collect (e.g., cash, accounts receivable, employee advances).
2. Liabilities: The things you owe or have obligations to pay (e.g., accounts payable, payroll liabilities, loans payable, customer deposits).
3. Equity: The book value of your business (assets – liabilities = equity).
The total equity at the bottom of your balance sheet is the book value of your business.
In the video above, I show you some transactions to help demonstrate how the accounting balance sheet works, how to analyze it, and a bit on how to review it.
If you missed it, be sure and catch last week’s post “Here’s Everything You Need to Understand Your Statement of Cash Flows.”