How to Ensure Accuracy on Financial Statements

The financial statements of a company include the income statement, balance sheet and the statement of cash flow. The income statement summarizes the revenues, expenses and profits in an accounting period. The balance sheet lists the assets, liabilities and shareholders' equity, and the statement of cash flow summarizes the cash inflows and outflows. Accurate financial statements are important because management, investors, creditors and external auditors depend on reliable and complete information to assess the financial health and performance of companies. Accuracy starts with journal entries and ends with the chief executive certifying the reliability of the information.

Ensure the accuracy of the data entry process, which involves journal entries of financial transactions and the posting of journal entries to the ledger. If your data entry professionals are making math errors or entering the data in the wrong accounts, even a sophisticated accounting package will not detect it. Training and random monitoring are two ways to ensure quality control in the data-entry process. In a November 2010 "Northern Nevada Business Weekly" article, certified public accountant Mike Bosma recommends that you provide the data entry clerks with a printed chart of the company's accounts to use as reference so they enter the data in the correct accounts.

Reconcile your accounting records with external records, such as bank statements, supplier invoices, credit card statements and other documents. The numbers should match. For example, the cash balance on your balance sheet should match the ending balance on your bank statement. Similarly, the long-term liability balance should match the total balances on mortgage and other long-term loan documents.

Check for obvious balance-sheet errors. In a guidance note published on its website, the Illinois Small Business Development Center at Illinois State University recommends that small-business owners look for obvious errors on the balance sheet, such as a negative cash balance.

Review the income statement for possible errors. Cost of goods sold should not be the same each month, because your sales composition is likely to vary each month. If you have fixed assets, there should be an entry for depreciation expenses. Verify that you have made the adjusting entries for accrued but unpaid expenses, such as interest expense and salaries expense.

Verify that you have made adjustments for non-cash expenses in the statement of cash flows. The difference in the net cash balance between the previous and current periods should match the change in your bank statements, assuming that loan proceeds go through your business's bank accounts.

Follow up with your bookkeeper, store manager or the warehouse supervisor if you spot anomalies. For example, a higher-than-normal inventory balance might be the result of too many obsolete or discontinued items in stock. A high sales return amount may indicate a quality control problem in your manufacturing facility or in your supplier's facility.

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About the Author

Based in Ottawa, Canada, Chirantan Basu has been writing since 1995. His work has appeared in various publications and he has performed financial editing at a Wall Street firm. Basu holds a Bachelor of Engineering from Memorial University of Newfoundland, a Master of Business Administration from the University of Ottawa and holds the Canadian Investment Manager designation from the Canadian Securities Institute.