Do you constantly wonder if your accounts are going to balance at the end of each month? Do you find it difficult sometimes to understand why your debits don’t match your credits? Are you unsure why this even matters?
Books that don’t balance are books that aren’t accurate. Unbalanced books can lead to incorrect financial reporting and uninformed decision-making. Unbalanced books can also create issues with the Bureau of Internal Revenue or BIR.
We want to help business managers and owners avoid these kind of situations and be confident that their books always tell the true story about their business. Having confidence in your accounting and bookkeeping services is important!
So we have identified below 6 expert accounting tips and best practices to help make sure that your books always balance!
Let’s start with first principles of accounting – the double-entry bookkeeping system.
Expert Tip No. 1 – Always Apply the Double-Entry Bookkeeping System
For books of accounts to balance, the entry of every transaction should follow the double-entry system of accounting.
The double-entry system operates on the basis that every financial transaction is recorded in a minimum of two accounts. For example, the collection of receivables by a company is not just recorded in the receivables account – it is recorded in the cash account and the receivables account.
In double-entry bookkeeping, there should always be at least one debit side and one credit side entry for every transaction. Debit entries are recorded on the left side of an account. Credit entries are recorded on the right side of a corresponding account.
Let’s look at an example!
A restaurant purchases a refrigerator for P10,000, to be paid on account – i.e. the supplier’s bill has not yet been received. This transaction will be recorded (a) as a debit in the Equipment Account and (b) as a credit in the Account Payables:
Equipment (debit side) Dr – P10,000
Accounts Payable (credit side) Cr – P10,000
The above entry satisfies the double-entry system of bookkeeping. There are at least two accounts (Equipment) and (Accounts Payable) and there are also corresponding debit and credit entries.
To fully understand the benefits of using the double-entry system, another key accounting concept must be considered: The Accounting Equation.
Expert Tip No. 2 – Understand the Accounting Equation
The Accounting Equation provides that the total value of a company’s assets should be equal to the value of the company’s liabilities plus shareholder ownership (equity). Remember – an asset cannot just be generated out of thin air – it must always have an identifiable origin and ownership.
The Accounting Equation looks like this:
Assets = Liabilities + Equity
The accounting equation is a really important concept. That’s why we explained it in greater detail in our recent article on the 7 key accounting and bookkeeping concepts every business owner and manager must know.
To illustrate the importance of the accounting equation, let’s return to our example above:
Equipment (debit side) Dr P10,000
Accounts Payable (credit side) Cr P10,000
In order to see if the record above follows a balanced accounting equation, let’s plot it:
Remember – Assets = Liabilities + Equity
P10,000 (Equipment) = P10,000 (Accounts Payable) + 0 (equity is not applicable in this transaction)
P10,000 = P10,000
As you can see here, both sides of the equation are balanced at P10,000. As such, the entry balances, from the perspectives of both double-entry bookkeeping and the accounting equation.
We are now well on our way to ensuring that our books balance!
Expert Tip No. 3 – Conduct Regular Trial Balance Checks
By checking the final balance of the trial balance on a regular basis, business owners and managers can know if their books are balanced on an ongoing basis – not just around audit season or at the end of the financial year.
How does this help? The total debits and the total credits of a trial balance should always be equal. If they aren’t, you can be pretty sure that there is an issue somewhere within the books!
So, what exactly is a trial balance? It’s a consolidated listing of the balances of all the company accounts at a point in time, in a debit and credit format, one on top of each other.
Importantly, a trial balance should not be confused with an income statement.
If the trial balance does not balance, it means that there’s an error somewhere in the accounting journals, ledgers or maybe within the trial balance itself. Don’t forget to check for data-entry errors! Our recent article identified a number of ways to avoid data-entry errors arising.
While the trial balance may not be able to identify where the issue comes from exactly, it can confirm the presence of an issue – which is key!
The earlier an issue is discovered, the easier it is to correct.
One of the first reports your auditors will ask for is the trial balance. Make sure it is up to date, clearly presented and accurate! Here are some other key considerations that Philippine companies need to think about during audit season.
Expert Tip No. 4 – Separate Business and Personal Transactions
The “separate entity concept” must also be followed to ensure the accounting books balance.
The separate entity concept requires that the personal affairs of a business owner be recorded separately from those of the business – at all times.
Let’s take the example of an owner withdrawing cash from her business for personal use. How can this transaction affect the balance of the company books?
Suppose the owner takes P1,000 from the cash register. The cash sales for the day are P5,000. The company accounts will not balance if the owner’s withdrawal is not recorded. There will be a discrepancy of P1,000 between the sales account and the cash account.
To ensure such an imbalance does not arise, an owner should always inform their bookkeeper about a personal withdrawal. The bookkeeper should then record it properly in the books as a withdrawal or an advance to the owner. This will help ensure that the books balance.
Expert Tip No. 5 – Compare Budgets with Financial Statements
Budgets can also be helpful to ensure the books of accounts are balanced.
A budget is a financial plan that outlines expected revenues and costs of a business over a period of time.
A budget can be used to anticipate the spending or income of a business. It can then be matched against actual spending and income, or a financial statement, to see if the business is hitting, or is on track to hit, its financial targets.
A financial statement is a report that identifies the financial activities and performance of a company over a period of time.
So, how exactly does the existence of a budget help to balance a company’s books?
Suppose, after review, you see that your trial balance does not balance. However, you don’t know where the issue lies. You can start your investigation by matching your actual account or financial statements against your previous budget.
If there is a large discrepancy between a specific area of the budget and an area of the financial statements, then you know where to start looking for the issue. Check all relevant journal entries associated with this particular balance and find your problem!
In future, a company should then take steps to ensure it aligns as closely as possible with its budgets.
Expert Tip No. 6 – Automate the Books of Accounts
Your books have a better chance of balancing if there is a system in place to automatically prevent any accounting entry that does not follow the rules and protocols required to balance the accounts.
An automated computer accounting system, also known as a cloud accounting solution, is the best solution for this.
Cloud accounting solutions are accounting systems hosted on remote servers. These solutions enable a company to perform all of their accounting and bookkeeping activities on one platform. They also enable the generation of budgets, forecasts, financial reports and identification of key financial information. Xero and Quickbooks Online are two examples of online accounting solutions used by the CloudCfo team.
Access to these systems requires an internet connection and a computer system. Because the system is connected via the internet, it allows real-time accessibility of data and full transparency for a company across all accounting and bookkeeping activities.
Cloud accounting solutions have various built-in controls that can help to ensure the standard accounting protocols (e.g. double-entry, accounting equation, etc) are followed.
By using online accounting solutions, a company can greatly improve the accuracy of its accounting books.
For further information on the benefits of cloud accounting, check out the 8 reasons why SMEs should embrace cloud accounting and also see how cloud accounting can save your business time and money!
Need help balancing your books?
CloudCfo can help your business get its books in shape.
Our team can perform a full review of your existing bookkeeping processes, remove pain points and identify areas where real value can be added to your business.
If it is the case that your accounting books have not been reviewed in some time, catch up accounting could really benefit your company – and we are experts in this area!
CloudCfo is leading the way as an accounting and finance provider in the Philippines offering services via cloud accounting technology for the benefit of all our clients.
Visit us at www.cloudcfo.ph or drop us a line at firstname.lastname@example.org for more information on how your company can really benefit from cloud accounting.