We are constantly looking for balance in our lives. Balancing work and family is a popular concern, as is balancing our investments or even balancing our diets. Can anyone ever claim to have successfully achieved balance in these areas of their lives? Once we achieve it, can we maintain it? And then, how do we use it?
What about purpose? Is there a purpose to everything we do, and can we successfully argue that our true purpose is ever-changing? In this first article of a two-part series, I will give you my opinion on the value of balance in accounting, and in the second article, I will explore the higher purpose of accounting.
It is not a secret that accounting requires balance. Have you ever heard of debits and credits in accounting? It refers to the two sides of each transaction, the debit side and the credit side. A well designed accounting system demands constant balancing of the debits and credits and any issue should cause an imbalance by problems popping up on one side like those little critters in a “Whack-A-Mole” arcade game. Remember those? Well, at least you hope they will pop up with every issue, which is precisely my point. Not all issues in your accounting system rear their ugly “mole” heads to be discovered and resolved. Balancing the books should not be the objective of an accounting system, but rather one of many logical steps in the path to a higher objective.
Accounting results in reports that summarize the transactions and adjustments that take place during a period of time. These reports have a connection to each other, and when transactions are entered properly, the connection is successfully established. One good example is your bank reconciliation report: The report should show zero unreconciled difference, and the book balance in the report should equal the bank balance in the balance sheet. But does it stop there? Does our accounting work stop when we create the desired balance?
Balanced books can have many problems that do not show up as a “mole” in the reports that are generated. In the example above, if we had stopped our process with a bank reconciliation that had zero unreconciled difference and traced to the bank balance in the balance sheet, we may not have noticed that there is an uncleared deposit that is three months old. This is an indication of multiple potential problems: a deposit duplicated in the system, a bank error, or a potential fraud. Any of these scenarios results in misrepresented reports.
We don’t balance the books to create financial statements. Balancing the books is the starting point before a necessary review of the balances to ensure that they are properly supported and are stated accurately. The larger process of closing the books on a monthly basis only begins with balancing the debits and credits. If the books and records do not balance, there is a critical problem in our accounting. If they balance, there could still be problems; some even critical.
Balancing the books is like maintaining your balance while riding a bike. It is critical to moving ahead, but unless you pedal and steer, you will not get anywhere.
Maribel Ponist, CPA is CEO and Director of Client Accounting Services at Lumix CPAs and Advisors. She is a member of the Advisory Board for CPA.com and the AICPA Digital CPA Conference. She also serves as a peer reviewer for the Maryland Association of Nonprofits Standards for Excellence Institute®. Follow Lumix on Twitter, Facebook, and LinkedIn for the latest insights, news, and updates in accounting and advisory services.