Are You Making These Balance Sheet Mistakes?

Business
Reading Time: 4 minutes

By: Ruth King

 

Pull out your latest balance sheet.  Do you have negative assets (with the exception of accumulated depreciation)?  Do you have negative liabilities?  Then, your financial statements are wrong.

Garbage in equals garbage out.  You shouldn’t make business decisions on data that’s wrong.

First, negative assets and how to fix them. Next, negative liabilities and how to fix them.

The major negative assets:  cash, accounts receivable, and inventory.

Negative Cash

You cannot have negative cash.  The bank would charge you exorbitant fees for bouncing checks and if you have too many bounced checks they will close your account.  Most of the time negative cash means that there were checks printed from your accounting system and the checks are sitting on your bookkeeper’s desk waiting until there is enough money in the account to send the checks.

Or, there is a lot of money in undeposited funds that has actually been deposited but the deposit hasn’t been made in your accounting system.

Either way, your balance sheet is wrong.

Two things to do:

  1. Don’t print checks without having the money in the bank to send the checks.
  2. If you are using undeposited funds, then make your bank deposits through undeposited funds rather than manually (i.e. make the bank deposit and go to the bank without entering it into the computer).

 

Negative Accounts Receivable

You cannot have negative accounts receivable.  Yes, on your accounts receivable aging report, there may be a few customers that you owe a refund to or that overpaid their bill by a dollar or two.  You don’t owe your entire customer base money.

Generally this happens when you get a deposit for a job and there is not a liability account set up (usually it is deferred income – deposits).  The deposit goes into accounts receivable and it is negative because there is not an invoice to offset it.

One thing to do:

Make sure that your accounting software has a deferred income – deposits account and that when deposits for jobs are received they are posted there rather than accounts receivable.

Inventory

You can’t have negative inventory – that’s phantom parts!  Most of the time this happens when materials/equipment have been credited from inventory for use on jobs and when inventory is ordered, the inventory doesn’t go into inventory.  It goes into cost of goods sold.

Two things to do:

  1. If materials/equipment are not purchased directly for a job, those materials/equipment go into inventory. When they are used, they are taken out of inventory.
  2. Take a physical inventory (I know this isn’t a fun thing to do) at the end of the year. From now until December, just make sure that materials that are purchased for inventory go into inventory and when they are used on jobs, they go out of inventory. Get in the habit of doing it properly and fix the actual value at the end of the year.

 

The major negative liabilities:  credit cards, payroll taxes, and loan payments.

Negative Credit Cards

The only way you can have negative credit card balances is if you prepay your credit card bill or you get a refund on a purchase with that being the only activity on your credit card.  Prepaying the bill doesn’t happen very often except, perhaps, at the end of your fiscal year.

Most of the time, the credit card company doesn’t owe you money.  You owe money to the credit card company.  This is generally a bookkeeping error.

Two things to do:

  1. Make sure the credit card statement is reconciled every month (similar to the bank statement reconciliation). Then you catch mistakes.
  2. Make sure you get the receipts for the charges on the credit cards. Then you enter the charges for each expense so that your P&L is accurate with respect to expenses.

 

Negative Payroll Taxes

Most of the time you cannot have negative payroll taxes.  This means that the government owes your company money. Probably not.  I have seen cases where the payroll company makes mistakes and overpays your payroll taxes.  In these rare cases your payroll tax balance on your balance sheet will be negative.

Payroll taxes are paid by the employee and the company. This is where the confusion often comes in. And, if you pay the payroll taxes weekly, these liability amounts should be zero (except if the payroll tax is due on the first day of the next month – then there could be a negative value).

Your company does not have negative garnishment payments, health insurance payments, 401(k) payments, etc.  You owe the money to those entities.  They do not owe money to you – unless there has been a mistake and you overpaid these bills.

Two things to do:

  1. Make sure that the payroll tax entries are correct. Separate company liabilities (which are an expense on your P&L) from employee tax liabilities which you pay to the government on their behalf).
  2. Make sure that your payroll company is paying the correct amount of tax.

 

Loan Payments

You can’t have negative loan payments – that means the bank owes you money for the loan. Generally this happens at the end of the loan if the entire principal repayment was debited against cash when the payments were made.

The monthly loan repayments are a combination of principal reduction and interest.  For example, if the monthly payment is $750, then $500 could be reduction of the loan principal (a balance sheet item) and $250 is interest (a P&L item).

One thing to do:

If you see negative loan payments, then you need to find out what the actual loan amount is and correct it on your balance sheet.  The difference is interest payments – which belong as expenses on your P&L.

Make sure your balance sheet has positive balances everywhere except in accumulated depreciation and in equity.  If there are negatives, your balance sheet is wrong.  Correct the mistakes so that you can make good decisions based on accurate information.

Fix these balance sheet mistakes.  Then you can make better financial decisions based on your accurate balance sheet.

 

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