25 Nov Black Holes in Bookkeeping (Part 4): Understanding Financial Statements
In this final article of our 4 part series, we are sharing some “black holes” that could be lurking if you do not understand your financial reports.
Here are 5 financial reporting black holes:
- Business expenses are lower than actual costs, because business purchases have been recorded as owner’s personal withdrawals. For example, you may have purchased groceries for an event to entertain your clients and the bookkeeper interprets this purchase as a personal expense.
- Income is higher than actual. For example, you put personal money into your business bank account to pay some bills and the bookkeeper interprets this deposit as income.
- The amount people owe your business and income are higher than actual. For example, an invoice to a customer from five years ago, is still be on the Accounts Receivable list even though this customer paid you in cash and you did not deposit the cash into the business account.
- The amount of money in the bank is lower than actual, and expenses are higher than actual. For example, when comparing the bank balance on your financial reports to the amount on the bank statement, a cheque you issued a year ago is listed as outstanding.
- The amount of money you owe suppliers is higher than actual. For example, an invoice from a supplier from five years ago, is still on the Accounts Payable list even though you will not be paying it because you did some work for the supplier instead of collecting money.
In all the above cases, your small business financial reporting is not accurate and putting you at risk of the following:
- Making business decisions based on wrong information.
- Paying too much, or not enough, income tax and GST.
- Paying big penalties in the event these mistakes show up during a government audit.
It would be great if small business owners could rely solely on their bookkeepers and accountants to produce accurate financial reports. But you do have to take ownership of finding black holes yourself for these reasons:
- Bookkeepers and accountants do make errors, as in any industry.
- There is information in your brain that has not made it to your bookkeeper in a proper format (so they can’t use it).
- Paper goes missing before having a chance to get it to your bookkeeper.
Your best protection against these vulnerabilities is to take ownership, with your bookkeeper and accountant, for your financial record keeping.
If you are not understanding your financial reports and your accountant is not explaining them in such a way that makes sense to you, email us at firstname.lastname@example.org to schedule a telephone, or in-person, appointment to discuss with Christine.