Biggest Bookkeeping Secret
It’s managing the balance sheet.
Many of the problems we’ve seen with bookkeeping can be traced back to not keeping an accurate balance sheet. We see many people focus only on the profit and loss report, and ignore the balance sheet. Big mistake.
Balance Sheet Bookends
Think of the balance sheet as being like a set of bookends. The balance sheet as of the beginning of your fiscal year is one bookend and the balance sheet as of the end of your fiscal year is the other one.
These balance sheet “bookends” serve as anchors for your profit and loss results for the year. If the balance sheet bookends contain errors, it’s likely your profit and loss report also has errors.
You should be able to look at your balance sheet as of the end of any given month and understand each number. You should also have detail support for each number. If you don’t understand the balance sheet numbers and you don’t have support for them, you likely have accounting problems.
What is the profit and loss report anyway?
The profit and loss report shows the detail of the change in net assets on the balance sheet from the beginning of the year to the end of the year.
A common problem is when transactions impacting asset or liability accounts are coded to profit and loss accounts instead. If this happens, the balance sheet is wrong and the profit and loss report is also wrong. For more background on this problem see our post, Nonprofit Balance Sheet Framework.
Nonprofit Chart of Accounts Grand Tour So Far
Since January, other than a few detours on other topics, we’ve been on a Nonprofit Chart of Accounts Grand Tour. We started our Tour with commonly used balance sheet accounts. Here is a guide to the posts so far with links:
You know how some places you just like to visit again and again? Well, cash is one of those places. We had to circle back on cash and add that last post on bank reconciliations.
The above posts are intended to introduce you to some of the more common types of balance sheet accounts and how to manage them. If you have a handle on the balance sheet accounts, you are well on your way to financial reports that contain useful information.