The accounting questions small business owners should be asking.
How much money did I make last year? That’s what a lot of business owners want to know right now—and for good reason.
As a bookkeeper, my answer when you ask me how much money you made will often be, “You’re asking the wrong question.”
Instead, the first question you ask should be: Is the accounting balance sheet accurate?
Making Sense of Your Accounting Balance Sheet
If your accounting balance sheet is not accurate, then your profit and loss is worthless. And by worthless, I mean, literally worthless. Whatever your profit and loss says you made this year is completely unreliable if your accounting balance sheet isn’t complete and accurate.
You make five “management assertions” when you present financial statements to someone:
1. Accuracy: Are all transactions recorded, and without errors?
2. Classification: Is everything coded to the correct accounts?
3. Completeness: Is anything missing/unrecorded?
4. Cutoff: Is everything recorded in the right period?
5. Occurrence: Did the transactions that were recorded actually take place?
I cannot tell you how much money you made until I’ve confirmed all of the above, and that requires a thorough review of your accounting balance sheet.
What is an Accurate Balance Sheet?
Your Accounting Balance Sheet is a snapshot. It’s a moment in time, and it answers one simple question at its foundation….
What is Your Company Worth?
Isn’t that a better question than how much money you made? You can make $1 million, and then you can spend $1.5 million and your company isn’t worth squat. I have no idea what “squat” is actually worth. In this case, I suppose it’s $500,000.
The balance sheet is broken up into three parts:
1. Assets: The things you own or have rights to collect (e.g., cash, accounts receivable, employee advances).
2. Liabilities: The things you owe or have obligations to pay (e.g., accounts payable, payroll liabilities, loans payable, customer deposits).
3. Equity: The book value of your business (assets – liabilities = equity).
The total equity at the bottom of your balance sheet is the book value of your business.