The beauty of using double-entry accounting is that your books are designed to be “in-balance”. If they are not in balance there is an error. Therefore, after running a set of financial statements, it is important to check the general ledger (GL) account balances on the Balance Sheet.
There are some “at-a-glance“ figures to check first. Do the Assets equal the Liabilities plus Equity? Does the Cash GL account balance with the Bank Reconciliation? Is the Net Profit or Loss figure on the Income Statement the same as the Net Profit or Loss figure found in the Equity Section of the Balance Sheet.
Next, on a monthly basis, make sure that the Accounts Receivable GL balance ties to the Accounts Receivable Ageing Report, and that the Accounts Payable GL balance ties to the Accounts Payable Ageing Report.
The frequency of checking the GL balances of Inventory, Fixed Assets, Accumulated Depreciation, Current and Long-Term Notes, Sales Tax Payable, Payroll Tax Payable is up to you and the demands of your business. Some do it monthly, quarterly, semi-annually, and annually.
What happens if you find an error? You must trace back the series of entries that were recorded to the particular GL account that is out of balance. Your best analytical tool for this is a report called “The Detail of the General Ledger”. Review my latest article posted on this blog titled, “The Detail of the General Ledger Report: Your Most Valuable Analytic Tool”. I give examples of how you use this report to find the origin of an error.
There are all kinds of errors that can occur during the accounting process. With experience, you will become familiar with these errors and it won’t take long to figure out what happened. Some errors are easy to spot, but occassionally you will find one that is really insidious. You have to put on your detective’s hat, look for clues, and be very thorough as you work your way through the problem. Being organized helps a great deal. Making sure to review all the material in front of you is essential. The mind is an amazing thing. When you review material, it gets stored in the brain. As you are looking for the missing link when solving a mystery, your mind will make a connection with some item of information that you reviewed earlier. Accountants learn to trust their minds when that little voice way in the background says, “Hmmm, I wonder if ….” More often than not, it proves to be valuable.
I avoid taking short-cuts because I have learned that what may seems like a time-saving step might prove to be the longer route. I don’t like to “net” figures together. I will take the extra time to write each part of a transaction so that I can trace back and remember what I was doing. One of the most annoying things you can do to yourself is write a journal entry with no explanation. Sure enough, if there is an error, it will be related to the journal entry you wrote with no explanation. There you sit, unable to remember why in the world you wrote that entry. Do that a few times and you will learn quickly the error of your ways.
Big Tip: Searching for that error and can’t find it? Take a break. Come back the next morning and miraculously you will find the error within a few minutes. The mind works in mysterious ways. Here are a few common errors found in accounting:
- Transpostion error – Instead of writing 72 you wrote 27. If the error amount is divisable by 9, it is most likely a transpostion error.
- You wrote a 3 for and 8 or vice versa. You wrote a 4 for a 9 or vice versa.
- You wrote 300 instead of 30, etc.
- Your beginning balance or balance forward was incorrect. You’ll have to go back to a previous period to find the error.
- The GL account number or amount was entered incorrectly into the computer when posting.
- You reversed a debit entry for a credit entry or vice versa.
- The general journal entry debits did not equal the credits. (Calculation error)
- The GL code was written incorrectly when writing the journal entries or coding the cash disbursements journal.
Can you think of any more?
John
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