Not so fast.
If your year for accounting purposes is the calendar year (as opposed to a fiscal year ending in a month other than December), your profit and loss report starts out in 2018 with fresh, clean accounts that contain zero transactions. However, you carry forward the same accounting system design as last year. For you QuickBooks users, that means your chart of accounts, item list and class list carry forward. If the design of these elements caused problems last year, you are sure to run into the same problems again this year — unless you make changes.
Your balance sheet is another story altogether. It does not enjoy the same “automatic cleanup” as the profit and loss report whenever you start a new accounting year. The balance sheet carries forward the balances as of December 31, 2017 into the new year.
Your balance sheet accounts should stay on track and be correct if you are doing your bookkeeping properly each month, thereby keeping them cleaned up. The problem we often find is that no one is attending to the balance sheet and as a result problems accumulate. If your balance sheet is incorrect, then your profit and loss report may have errors, too!
A Quick List of Procedures to Maintain Your Balance Sheet
Here’s a list of common balance sheet accounts and the activities needed to keep them accurate:
|Account||Process to Maintain||Back Up Support|
|Monthly bank reconciliation with rigorous attention given to cleaning up uncleared items (outstanding checks and deposits in transit).||Bank reconciliation and bank statement with the same ending date as the reconciliation|
|Savings||Monthly bank reconciliation, though it may be done less frequently such as quarterly or even annually if the level of activity is low||Bank reconciliation and bank statement with the same ending date as the reconciliation|
|Accounts and Pledges Receivable||Properly entering invoices and applying payments made against the invoices to close them out; also writing off receivables that have been determined to be uncollectible.||Accounts Receivable Aging Detail Report showing each receivable that agrees in total to the amount per the account at month end|
|Miscellaneous Receivables||Recording miscellaneous amounts due from employees such as for inadvertent use of the organization credit card for a personal purchase or refunds due from a vendor.||Detail of amounts making up the balance, ideally in a report pulled from the accounting software or maintained in Excel.|
|Fixed Assets||Recording new fixed assets according to a predetermined capitalization threshold (How expensive does the asset have to be before you record it as an asset instead of an expense?); also removing fixed assets that have been discarded or sold.||Fixed asset depreciation detail that sums to the same amount as the total fixed asset accounts; could be maintained in Excel, depreciation software or the tax software used for Form 990 preparation.|
|Accumulated Depreciation||Recording depreciation expense properly and removing the accumulated depreciation associated with assets that have been discarded or sold.||Same as Fixed Assets above|
|Security Deposits||Recording security deposits such as a deposit for leased office space as a security deposit instead of rent and removing security deposits that have been refunded.||If not easily determined from the account detail, a list of security deposits in Excel that sums to the same amount as the account|
|Accounts Payable||Properly setting up amounts owed to vendors with a bill date reflecting when the expense was incurred and applying bill payments to close them out||Accounts Payable Aging Detail Report showing each payable that agrees in total to the amount per the account at month end|
|Credit Card Payable||Recording credit card purchases as increases to a credit card payable account and payments on the card as reductions on the account.
|Reconciliation of credit card and statement from the card issuer supporting the closing balance as of the reconciliation date|
|Loan Payable||Adjusting the principal balance via journal entry to the actual balance as of month end||Statement from the lender showing the principal balance|
|Temporarily Restricted Net Assets||Adjusting the balance in this account via journal entry to agree to the amount of temporarily restricted net assets on hand such as unspent restricted grant cash||Detail list of temporarily restricted net assets by funder that sums to the account total; report pulled from accounting system or kept in Excel|
Crazy Accounts and Account Balances
Often we see crazy accounts and account balances on client balance sheets. For example, one client had an account called “Test Bank” that actually contained a balance of over $2400. It was a fictitious bank account, perhaps set up as the name implies to test something, but the transactions posted to it had never been cleaned up. This account should have held a zero balance and the account should be been deleted if it was no longer needed. In another case, a client had over $30,000 of customer security deposits showing as held in a Customer Security Deposits liability account. Turns out, the actual amount held was closer to $6,800. Another account that turns up frequently is Opening Balance Equity. This account may be useful in the initial set up of the company file, but it should be zeroed out once the file is set up and never used again.
Balance Sheets Can Become Junk Drawers
Your balance sheet can become like that junk drawer everyone has somewhere which contains all those odds and ends that you are not sure what to do with. Balance sheets accumulate errors; they do not self-clean. And if your balance sheet is wrong, it is likely your profit and loss report is also wrong.
Bad data means bad reports. Good reports start with good data combined with good accounting system design. For more on optimizing the design of QuickBooks, see our earlier post, Lists: Key to Getting the Most Out of QuickBooks for Nonprofits.
Demand a Good Balance Sheet
Be a stickler when it comes to keeping your balance sheet clean. Demand to see back up support for each account so you know exactly what each balance sheet account contains. That way you’ll roll into your new accounting year with financial reports ready for the challenges of a new year!