It is always necessary to monitor your company’s financial health to spot issues. What visualizes the financial picture of your firm better than a balance sheet? A balance sheet is a financial statement that reflects the assets and liabilities of your business. The left side must equal the right side to tally the balance sheet. However, it is easier said than done. Companies often confront complicated problems while balancing this statement. This post will reveal common reasons for an unbalanced balance sheet. Keep scrolling to learn more!
5 Reasons for an Unbalanced Balance Sheet:
A mistake in the balance sheet will lead to disturbed and disorganized financial statements. The data you collect and insert into the books must be accurate and timely. What if you miss an important transaction entry in your books? The balance sheet will never tally. The decision-making abilities of your company will diminish with unbalanced balance sheets since they play a vital role. The following list will uncover common reasons you can face for an unbalanced balance sheet. Accountants and business managers must focus on these points to avoid mistakes in the future. Let us dive deep into the list!
1. Misplaced data:
Data damage is a possibility when you conduct your accounting operations. Whether you do things manually or use a software tool like Xero, QuickBooks, or Peachtree, these mistakes are inevitable. Sudden discrepancies in financial reports can damage certain files, which results in data loss. How can you put lost data on your balance sheet? The best way to fix this problem is to re-sort and rebuild your transaction files and consider the critical data points to keep them intact.
Another reason for unbalanced balance sheets is data misplacement due to human error. The best way to fix this is to double-check the accounts and conduct an audit frequently. It will help you keep the data in the right place and retrieve it when needed.
2. Incorrect transaction entry:
Human errors can lead to costly outcomes in the accounting department. One significant and common human error is incorrect transaction entry. It can lead to inaccurate financial statements and balance sheets. Humans can enter incorrect numbers or ignore an entry while updating the accounting books. No matter how good your accounting software is, these mistakes will happen once a week.
The best way to fix this is to cross-check your financial entries. Do you want to improve your accounting practices and reduce error margins? You should opt for an outsourced accounting solution for your business.
3. Working with different currencies:
Do your business export items and goods to other countries? If yes, you will receive payments in currencies like USD, AED, CAD, and AUD. Business entities and accountants often struggle to maintain a single accounting book for all transactions. Since you will deal with fluctuations in the exchange rates, you might confront the challenge of entering the accurate rate to prepare your statements.
These complications can lead to unbalanced balance sheets and other financial statements being inaccurate. What if you enter an inaccurate exchange rate? You will print inaccurate balance sheets, bringing no good to your company and stakeholders.
4. Change in inventory:
A change in inventory might not affect your balance sheet as much as it does the cash flow statement. It is because you must subtract the last month’s inventory from the inventory of the current month. The amount you get must be reduced from the cash balance. Does it sound too complicated? It is even trickier when you calculate this amount, leading to unbalanced balance sheets.
You can never do better without the help of expert accountants since they know how to go about things. These experts will help you prevent mistakes in inventory accounting, leading to accurate and insightful financial statements and balance sheets.
5. Equity calculations:
Your business must calculate the total worth of the owner’s equity for various decision-making activities. Your business might acquire new assets, which can lead to an increase in the total equity. If the assets and liabilities are mismatched during the calculation, your balance sheet will never be balanced. An error in calculating these amounts can lead to mistakes in your balance sheet.
You should use the software when calculating equity or the difference between assets and liabilities. It will help you reduce error chances and acquire better and more accurate outcomes. It would be best to opt for Xero accounting software for your business and exploit its long-term benefits for your company.
Improve Your Accounting Practices with Xero!
Xero is the leading cloud-based accounting solution for modern-day enterprises. It helps businesses perform accounting activities more swiftly and accurately. Do you want to enjoy its benefits? Consider contacting Xero accounting companies and purchasing the tool for your company. It will help you improve your accounting practices and reduce errors!