Back to Blog
A balance sheet is a financial statement which represents your company’s assets and liabilities. The assets and liabilities of your company should be equal to each other for your balance sheet to tally. A mistake in the balance sheet will rendered it unbalanced. As a result, it will make decision making of your company difficult which may affect your profitability as well. So, how do you fix an unbalanced balance sheet? Before you figure out the answer to this question, it is important to know why you have an unbalanced balance sheet. Here are a few reasons why you may have an unbalanced balanced sheet.
1. Data Damage or Misplaced Data
If you use Quickbooks, data damage is a possibility. Files being damaged can be caused by sudden discrepancies in reports. For example, if you pulled up a balance sheet for “all dates” while everything is balanced, “this fiscal year” will have an out of balance report which is most likely to be a transaction damage. Re-sorting the list and rebuilding the data is a way to fix this problem.
Also, data can being misplaced on account of human error. To avoid this, you need to double-check by conducting the audit for an accurate balance sheet. Conducting audit will help you identify any manipulations in the financial records as well.
2. Incorrectly Entered Transactions
This is a common human error and every owner should know that such mistakes can occur. Transactions can either be entered wrongly such as the incorrect numbers, ignoring the entry, only entering either the debit or the credit side of the entry, and more . To fix such issues, you need to cross-check your financial records and train your employees to avoid such errors.
3. Dealing in Different Currencies
If you export to other countries, you will be dealing in different currencies. In this case, it will be difficult for you to maintain one single book for all the transactions. Fluctuations in exchange rates may lead to difficulty in determining which rates should be entered in the books. Hence, if you enter the incorrect rates, you may end up with an incorrect balance sheet.
4. Change in Inventory
Change in inventory affects cash flow statement as last month’s inventory needs to be subtracted with the inventory of the current month. This amount then needs to be reduced from the cash balance. Calculating this amount can be tricky which can affect your balance sheet. Thus, taking help of a professional will help you prevent any mistakes relating to inventory accounting.
5. Equity Calculations
The total worth of owner’s equity should be checked. An increase in assets leads to increase in equity and vice versa. The balance sheet will not be balanced if the equity does not show the difference between assets and liabilities. Therefore, errors in calculating equity can be another reason why your balance sheet has not tallied.
Now that you are aware of why your balance sheet has not tallied, make sure you keep in mind these points the next time you enter the transaction details. So, if you want to fix an unbalanced balance sheet or want more information on this topic, then it is recommended that you consult a professional who will guide you.
Back to Blog
Every business can determine its profitability and efficiency based on the financial statements. Although profitability can be easily identified on financial statements, the efficiency of the organization can be understood with the help of accounting ratios.Therefore, businesses cannot neglect the importance of ratio analysis. The comparison or relationship between one accounting data-point and another helps in determining the financial condition of the company. Ratio analysis is done to compare how the company is performing with others in the industry and also to determine a company’s current performance with respect to previous years. Here are a few more reasons why accounting ratios are important.
Analyzing Financial Statements
Financial statements are very important because they are used for internal as well as external purposes. Ratio analysis plays an important part in assessing the financial position of a company. The company managers, investors, and creditors look at these ratios for decision making purpose. For example, if a company has a high debt-to-equity ratio, then banks will be reluctant to provide further financial assistance. This is because a high debt-to-equity ratio indicates that a company may not be able to generate sufficient cash to fulfil its debt obligations.
Optimum utilization of assets and the ability to earn profits by the company is judged by accounting ratios. Judging the efficiency will assist in the decision making process of the company and its capacity to expand in the future. Ratio analysis also helps to know at what pace the company is moving as compared to its previous years as well as its current competitors.
The overall performance of the company’s operations may be quite impressive. It may be difficult to identify any weakness when going through the financial statements. Accounting ratios can help locate these weakness even though the company is in a stable financial condition. It is extremely important for business owners to know where their business is not performing and to ensure suitable action is taken.
Accounting ratios are utilized to identify past financial performance as well as to establish future trends. Comparison of past ratios to the present can help in formulating a plan for the future. Formulating plans helps in decision making. Hence, business owners need to have accurate ratios in order to make a plan for the future.
Ratio analysis helps in comparing i the overall performance of a firm Internal performance is compared between different divisions, how efficiently they are working as a unit as well as together as an organization. Ratios are used by investors, bankers, and creditors to compare the past performance of the company and whether to currently invest in the company. Thus, by comparing the performance, you get a clear picture about the financial position of a firm and helps to identify areas of improvement for the future.The importance of ratio analysis cannot be neglected as they are equally important as financial statements of a company. Now that you are aware of the importance of ratio analysis, make sure you use them to enhance your firm’s performance and take right business decisions.
Need any help regarding your financial books of accounts? Consult a professional who will give you all the required guidance and help regarding your accounting worries.
Back to Blog
The estimation to determine whether a particular of expenditure or investment is worth funding for a significant amount is called capital budgeting. The large amount of money spent for these investments are called capital expenditures. These investments are mainly for acquiring fixed assets such as machinery, land and building, etc. For getting accurate results to determine whether the investment is worthwhile, the process of capital budgeting needs to be carried out effectively and efficiently. Here are a few objectives of capital budgeting.
The correct investment decision can yield spectacular returns. The effects of capital budgeting decision will have a long-term impact on your business. For example, a machinery may be bought initially for a huge expenditure which can affect the correct spending of the company. However, the returns from the investment will be obtained in the coming years. Thus, you need capital budgeting to help you take decisions which have a long-term implications on the firm. Hence, the future of the firm is determined by capital budgeting.
Large Amount of Funds
Making capital investment decisions require large amounts of funds. Companies cannot afford to make any wrong decisions especially, when huge sums of money are involved. Thoughtful, wise and correct investment decisions should be made, otherwise the company will incur losses.
Capital budgeting decisions cannot be reversed once they are taken. The reason for this can be that either these capital assets cannot be converted into usable assets or second hand capital goods have no value in the market. Hence, the only remedy is to dispose off such assets which will sustain heavy losses to the firm.
Most Difficult Decisions
Capital investments are the most important decisions that are to be made by the company. These decisions make or break a path for a profitable future. It is extremely difficult to estimate the costs which will be incurred in the future due to political, technological, and economical factors which affect the estimated benefits and costs.
Budgets are used by companies to determine their future growth and expansions. The capital budgeting decisions that are taken help you to plan for future business developments. Therefore, before you go ahead with executing your plans, you need to plan whether the project you undertake has a good return on your investment or not. The same is the case when you purchase an asset to enhance your output and scale your business operations. You need to determine the cost of machinery, the payback period, the net revenue you generate in subsequent years, etc. This is possible only when you use capital budgeting to plan for your company’s future activities.
Now that you know the objectives of capital budgeting for your business, you should use it for making any of your business decisions. For the growth of your company and increasing profits, you need to have capital budgeting. If you find it difficult to take any financial decisions, then get in touch with professionals who will help you out. Also, if you need help in managing your asset.
Back to Blog
Having a record of your daily transactions is essential for your business. However, maintaining your financial records is not an easy task. You can do it yourself but there are chances of making certain mistakes which may cost your business. We have listed some common errors that entrepreneurs make while maintaining their financial accounts. The effects of errors on financial statement can be costly and hence, every businessman should be aware of the common errors that are made on financial statements.
1) Errors in Classification of Assets and Liabilities
Your balance sheet is the most important statement as it tells you the financial condition of your company. Although you might have studied the balance sheet over and over again, classification of assets and liabilities can be quite confusing. You need to know how much amount you are liable to pay and how much amount you should receive from your clients. Hence, classifying your assets and liabilities in the right way is of utmost priority.
2) Errors in Income & Expenditure Statement
Income and expenditure statement basically is made to calculate the cost of goods sold. A miscalculation or misleading figure may massively affect the cost of goods sold, net income, and gross profit. Furthermore, it is important to maintain the income and expenditure statement up-to-date. Any error in this sheet may directly affect your profit and loss statements, leading to understating or overstating of profit or loss.
3) Errors in Cash Flow Statement
Some common errors in cash flow are overstating operating cash flow, grossing up non-cash settlements, netting off transactions, errors with foreign currency, and errors in determining what is “cash” or “cash equivalent”. Financial consultants emphasize that the cash flow statement information is 100% accurate because the investors place emphasis on it before making any business decisions.
4) Data Entry Errors and Errors of Omission
Data entry errors occur when the data is incorrectly entered in the financial database from the financial documents. These errors occur when there are mathematical human errors in the books of accounts. For example, numbers may be reversed by mistake such as 27 may be written as 72. This is a basic human error and hence, you need to cross check to avoid such mistakes.
The error of omission refers to the entry not being recorded by the accountant, this may happen when there are a lot of transactions and the accountant may forget to feed in one or two of them. These are two basic human errors and double checking has to be done to avoid them.
5) Errors in Inventory
It is important to have an estimate of the inventory in your warehouse as well as the inventory which is in transit. In some cases, you may be dealing with different types of inventory and may have to decide how much inventory you require in the future. One of the common errors is to re-record any sales return, that is the inventory has been returned and is now back in your warehouse again. In fact, if you have many different inventories, then it becomes difficult for you to keep a track of them. It is strongly recommended to hire an accountant who will do a much better job instead.
The effects of errors on financial statements can affect your books of accounts severely. You can end up taking wrong decisions. Hence, take time and make sure your books are balanced so that the future of your company is safe and secure.