Small business owners, in my experience, are very focused on a report called the Profit & Loss Statement which lets the business owner know if the business is making a profit or not. However, there is a report that often confuses my clients called the Balance Sheet (aka the BS). I think that because people do not understand their BS that they do not see the benefit. The Balance Sheet is a report that shows cumulative balances since the beginning of operations (as opposed to the Profit & Loss Statement which shows activity over a period of time). The BS shows you the balance as of a point in time (such as today, end of last month, or end of last year). Here are some reasons to love your BS:
Cash To Spend – Your BS shows you how much money you have available to spend on upcoming bills. As long as you are current with entering checks, debits, deposits, transfers, and other activity that flows through your bank account, you can generate your Balance Sheet to see how much money you have left that you can use to pay your bills or even pay yourself!
Looking at the bank balance daily online may assist you in figuring out if you have money available for bills, but the online bank balance fails to take into account checks you have written that have not been cashed yet and deposits (such as credit card payments) that have not been deposited into your account. So the online balance is not accurate and paying bills using this balance may cause you to suffer NSF fees and black marks with banks.
I had a client once who I told numerous times to stop calling in to find out his bank balance (this was years ago before the Internet was so popular to perform online banking). When I completed his bookkeeping, I informed him that if all the checks he had written cleared today then he would have about $ 17K negative bank balance. About a week later he called me to say that my impending doom never occurred, from which I asked if he received customer payments since seeing me and he had.
Payroll Liabilities – This account in your BS lets you know right away if you either have not properly paid your payroll taxes to the appropriate taxing agency or if you improperly recorded a transaction. Some clients use a payroll tax service which withdraws the payroll and the payroll taxes on the same day, so after recording the payroll the balance in the payroll liabilities account should be zero. For clients who pay the taxes when due, the balance in the account should equal the amount owed in the following month/quarter. And payroll taxes are not to be played with. The IRS, in my experience, is very aggressive, putting liens on peoples houses and sending them to jail. So look at your BS to make sure you are up-to-date with payroll taxes.
Wages Payable – If you use an outside payroll service, one way to record payroll is to record all net monies owed to employees to an account called Wages Payable. Then, when you record the checks individually written to the employee you also use the account called Wages Payable. This account should be zero after you record payroll and enter all the payroll checks.
Undeposited Funds – This account is unique to QuickBooks. If you receive a payment from a customer that has been applied to an invoice or you have received a payment from a customer through the sales receipt screen, by default QuickBooks records the amounts to Undeposited Funds. This account is important to look at when you view your BS. The account should go to zero as soon as you make the “deposit”. If this account continues to grow, then you are missing a step in your accounting process. And if you are missing this step AND download transactions, recording the deposits, you are recording your sales two times and increasing your taxes!
Accounts Payable, Accounts Receivable, & Inventory – Generate your BS. Then generate your Accounts Payable aging report, Accounts Receivable aging report, and Inventory Valuation report using the same date as your BS. Assuming your reports are all on an accrual basis, the aging and valuation reports should equal the balances on your Balance Sheet. For example, if the AR Aging report shows $ 23,500 as the total balance as of 3/31/12, then the Accounts Receivable balance on your Balance Sheet as of 3/31/12 should also be $ 23,500. If not, you have an error with your data entry and need to fix this problem.
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