Do you know if your business accounts are in good health? Do you know how to tell if your financial reports reveal bookkeeping problems or errors?
Here at On The Money Bookkeeping Melbourne, we are often contacted by business owners who want to hand over their bookkeeping as their business grows and becomes more sophisticated. But sometimes it’s not a straightforward process to hand over the accounts – the first thing we do is a ‘health check’ of the accounts, and at this stage, we often find significant problems in the file.
The job of handing over the bookkeeping becomes much more extensive – because we must first fix the errors and problems in the accounts before our team of expert Xero advisors can look after your business accounts.
So, how do you know if your file has bookkeeping problems?
Many business owners are in the habit of reviewing their profit and loss statements but don’t understand what the balance sheet is telling them. The balance sheet is crucial to understanding the state of your accounts and overall financial health.
Unless you’ve had training in how to understand the story your financial reports are telling you, it won’t always be obvious if there are bookkeeping problems with your accounts. But you can check some simple things to give you a sense of what state the accounts are in.
Take ten minutes now and check the following accounts on your balance sheet:
- The bank accounts listed on the balance sheet should reflect the actual balance in your physical bank account at a given date.
- Loans to or from your company should show on the balance sheet. We’ve seen vehicle loans listed on the balance sheet that were paid out years ago. We’ve also seen loans to the company being paid back and classified as income. Either scenario is a major problem!
- Do you have a payment plan for a BAS with the ATO? If so, the amount of debt should be reflected on the balance sheet, usually in an account named ATO Integrated Client Account.
- Wages payable should be zero or equal to the amount of wages owed for the last pay run.
- Is the super liability account correct? For example, if you know your average quarterly super expense is $5,000, and you’ve been paying it on time, but the balance sheet shows an amount owing of $50,000, then something is wrong with the accounts.
- Check PAYG withholding. If you know your average monthly withholding amount is $10,000 but the balance sheet shows an amount of $60,000 in credit, then you need to check how your IAS or BAS payments have been allocated.
- There are many other problems you might find when you go looking, for example, inconsistent treatment of regular transactions, missing deductions, duplicate transactions, incorrectly claiming GST on overseas purchases, classifying refunds from suppliers as income or refunds to customers as expenses… the list goes on.
Your liability accounts on the balance sheet should show the exact amount you owe to the ATO or superannuation at a given point in time. Of course, there are intricacies and complexities to reading the balance sheet, but we’ve just given you a few simple examples to check.
It’s common for people to make the correct payments to the ATO and State Revenue Offices but misallocate the payments in Xero. If this problem goes unchecked for months or years, you can end up with major errors in the file that become costly to find and fix.
Getting all the account allocations right the first time is much better!
How do bookkeeping problems arise?
Lack of knowledge is usually the culprit – getting your salesperson or receptionist to do the bookkeeping instead of someone who understands the requirements for accurate accounts management and has the relevant training. Would you ask your plumber to fix your faulty wiring? It’s one thing to have your staff perform some of the simple functions within their domain; for example, training the salesperson to enter customer invoices is practical. But it’s not useful to assume the salesperson then understands everything about bookkeeping and financial reporting.
Bookkeeping is more complex than many people realise! Some transactions can involve several accounts; for example, a BAS payment might be allocated to GST, PAYG withholding, PAYG instalment, and a fringe benefit tax instalment. These amounts should be allocated to separate accounts, but it’s not uncommon to see the total amount allocated to GST or PAYGW. This means that every one of those accounts is now inaccurate, and the balance sheet is incorrect and cannot be relied upon.
Another example is that payroll wage payments are often allocated to the wages expense account instead of the wages payable liability account. This throws out the P&L and the balance sheet.
Another common error is not reconciling bank accounts. We recently reviewed the accounts of a potential client with three bank accounts that had never been reconciled in six years of trading. In those six years, many duplicate payments and timing errors affected the accounts, and some transactions are still waiting to be allocated from several years ago. Those payments still sitting unallocated in the bank don’t show up on the P&L, the balance sheet or the BAS, so all the historical reports would have been inaccurate.
When a Xero bank account is formally reconciled, the balance is verified against the bank account, and discrepancies, omissions or duplicates are fixed immediately. The bank reconciliation should then be either published in Xero or at least saved to show that the Xero balance has been verified.
The accounts should be locked monthly or quarterly after the bank has been reconciled. This prevents further transactions from being entered, deleted, duplicated or changed unless necessary.
Another possible reason for problems is that the business has grown, and you can’t keep pace with the bookkeeping required. This is an excellent problem to have and means it’s time to consider getting the accounts looked after by a team of expert Xero advisors like On The Money Bookkeeping Melbourne!
What Next?
If you have reviewed your balance sheet and profit and loss statement and think things are in pretty good shape, well done! Keep reviewing your reports regularly, compare periods and reconcile your bank. Stay on top of your bookkeeping and talk to us when your business grows enough that you need to hand over the accounts.
But if you’ve looked at your balance sheet just now and realised you have some bookkeeping problems, we’re here to help! We can review your Xero file and highlight areas of concern or apparent issues. We’ll talk to you about what’s involved in fixing your file and providing ongoing professional accounts management services.
You might like to read some related articles: Elevate Your Success, Are you Looking to Grow your Small Business? or Do Your Business Processes Need to Catch up With Rapid Growth?
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