Recognizing The Top 3 Red Flags on Your Balance Sheet (and how to fix them)
Top 3 Red Flags on your Balance Sheet
Negative Loan Balances
How it Happened: A negative value for a loan account on your Balance Sheet is suggesting that you paid more than your principle amount. The most likely cause of this is that you haven't distinguished which portions of your payments were toward principle and which was toward interest on the loan.
How to Fix: Obtain a loan statement from your lender to help determine which amounts were paid toward interest or fees. This will require a Journal Entry to adjust the amounts appropriately until the Loan Account reflects the accurate value (usually Paid In Full).
Best Practices: There are several options to avoid this problem in the future. The most accurate approach requires the most effort. You can manually record the exact distinctions between principle and interest for each of your loan payments and reconcile those balances monthly. For some of our clients, that is an amount of effort and detail that is unmanageable. We find that simply estimating a principle/interest balance on each payment saves time because it can be automated. Then I simply adjust and reconcile the smaller difference at the end of the year to align the balance to the loan statements.
Unexplainable Value in Undeposited Funds
How it Happened: The Undeposited Funds account is meant to indicate an amount of money that has been "collected" but perhaps has yet to clear the bank. The most common example would be credit card payments that were charged on the last day of the month and don't deposit until 2 business days later. If your Undeposited Funds account value appears inflated or inaccurate, there has likely been a problem related to duplicating Payments Received.
How to Fix: The fastest way to research this problem and ultimately fix it is to try to record a new deposit. This will open a new window that shows all of the payments you have recorded in the system but have not yet tied to a particular deposit entry. They may indicate that you have duplicated payment entries or even sometimes revenue entries.
Best Practices: The Undeposited Funds value should be reviewed monthly for accuracy, ESPECIALLY before completing any Sales & Use Tax filings because the possible errors here directly effect the revenue calculations in the system that might be utilized to determine any S&U obligations.
Inaccurate Accounts Payable
How it Happened: There are two common errors that would cause this problem. Perhaps a Bill was entered more than once...duplicating the expense. Or perhaps the Bill was entered perfectly but the payment was recorded as a separate Expense rather than a Bill Payment...another overstatement of expense.
How to Fix: The best way to unravel a tangled Accounts Payable balance is simply to reconcile any of the accounts with vendors that you feel are in question. The vendor is often very happy to send over a report totaling all of the Bills and Payments made with them. Use this as your road map to find and fix any erroneous entries.
Best Practices: Two tiny things can offer big impact to avoid this problem going forward. First, it is important to always use Reference or Bill numbers when recording any bills in your accounting software. This gives the program an opportunity to determine if there is a duplicate bill entry. Second, always review your Accounts Payable balance monthly to ensure that no erroneous entries have the chance to settle in for long.
Benjamin Franklin said, "An ounce of prevention is worth a pound of cure." When it comes to your accounting work, this couldn't be more true.
Book a free Discovery Call to get customized guidance on ways to apply an ounce of prevention to your books.
