Balance sheet mistakes and how to prevent them

Your balance sheet consists of assets and liabilities. Assets are what is owned by the company and liabilities are what a company owes.  

On your business balance sheet:

Assets = Liabilities

Your assets must be equal to total liabilities. If they don’t match your balance sheet is unbalanced. This depicts that there is some kind of mistake. 

Your balance sheet is an indicator of business current and future health. 

If you want to avoid errors on your balance sheet, scroll down to read more. 

The most common balance sheet mistakes:

1.   Omitting transactions:

Sometimes, you may miss to record a transaction on the balance sheet. Omitting accounting transactions is a very common and fixable mistake. You might forget to record transactions like petty cash, inventory, supplies and other expenses. 

To prevent this error - you may want to set up a reminder to record transactions on a monthly basis. 

2. Recording transactions incorrectly:

This is yet another common mistake made by businesses. They incorrectly record the transactions and invert the numbers also known as transposition errors. 

A transposition error is when you reverse the order of the number while recording a transaction. Like for say, 45 is incorrectly written as 54. 

This error is easy to scratch off. To avoid this error, make sure you double check any numbers you put in your balance sheet. You can ask another employee to cross check the transactions recorded. 

3. Forgetting to record inventory changes:

Another common mistake that can take a toll on your business balance sheet  is forgetting to record inventory changes. Some businesses forget to tally and update their inventory levels at the end of each period. To prevent this error. Keep in mind to update your inventory at the end of each period. This way your inventory is up-to-date in your records. 

4. Not classifying data correctly:

When you’re recording transactions on the balance sheet, make sure to classify each transaction correctly as assets and liabilities. If you don’t correctly classify your transactions, you may end up with sheet blunder. To prevent this error, make sure you’re classifying each transactions correctly as assets (physical and non-physical properties that adds value to your business such as petty cash, inventory, accounts receivables, business computer, car, trademarks etc. and liabilities (current debts owed by businesses to other companies such as supplies, invoices, loans, mortgages, accounts payable etc.)

Double check with your bookkeeper or an accountant to make sure you classify each transaction correctly. 

5. Data Mayhem:

Balance sheet gives data about what  company owns and what it owes. A small error in entering data in the sheet can affect the balance sheet. The error could include wrong decimal for example, $499.99 entered as $4999.9 

Another mistake could be not following the currency rate. You make thousands of entries on the sheet, spotting these small mistakes is a big deal. The errors are considered minor but their effects are major. So be wide awake when preparing the balance sheet. Cross-check, triple check to ensure there are no mistakes. 

6. Isolation from chronology:

This is a rare error but very critical to an accounting process. It is vital to arrange the data in the balance sheet  in the actual sequence but many don’t take this seriously. The randomness on the balance sheet has a chance of you missing out on some vital data. So to prevent this error, keep the receipts and bills safely so that the balance sheet can be updated correctly. 

7. Lagging with technology:

Modern technology is highly in demand in the market but some businesses and accountants stick to traditional mediums. This explains why some of the businesses struggle with the balance sheet. Switching to accounting softwares may help you avoid errors. These softwares give updates in real-time and help you avoid any mistakes on the balance sheet. 

Following are the ways  to PREVENT common balance sheet mistakes:

Conclusion:

As soon as an error is detected, rectify it immediately. When it comes to balance sheets, the more organized you are the better. The best thing as a business you can do is to be proactive and keep detailed financial records for references. If you figure out the mistakes early, it becomes easier to address and prevent them. It is recommended for you to appoint a Financial Preparation professional to carry out the accounting procedures for your business.