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The Numbers.  The Books &Records.  The Accountant’s Bible.  All names for the financial statements of a company.

For the CFO, the financial statements are the language of operations, where the financial statements give key information to the performance and ‘health’ of the company.  For the entrepreneur, the financials chart progression to a vision, but also yields key operational insights to adjust along the path of growth.  And of course, the financials become a necessity for the small business owner on behalf of Uncle Sam to report income.

With as much value and sensitivity, one would think that the books & records are pristine and highly accurate, beyond reproach for all businesses.  If we factor in the significant development in small business software (QuickBooks, Xero, and other cloud options) and technological automation (integrations, adjacent tools), bookkeeping should be vastly improved compared to the prior generation. Online resources, videos and accessible training documentation is also just a search engine away.

Unfortunately, the lack of knowledge and human capital is woefully underserved for adequate bookkeeping.  Small-to-medium sized companies often have limited budgets – and direction – to create accurate data and information through its financials.

Accrual vs. Cash

Most pass-thru entities report financials on a cash-basis for tax purposes and the methodology is relatively simple.  If we get cash from our customers, then it’s revenue.  If we write a check/issue money to employees or vendors, then we have an expense.

While this approach satisfies income tax reporting, this cash-based accounting limits our scope to future impacts and misrepresents earnings in a given period.  An accrual accounting and accurate bookkeeping process gives the balance sheet shape, margins consistency, and illustratesfuture cash flows in the following areas:

  • Accounts Payable (bills received)
  • Accrual of liabilities (Recording expense in advance of receipt of a bill)
  • Loan/Lease Obligations
  • Accounts Receivables (representative of cash receipts)

Take an example where you sell a service for $100, invoicing at the end of a month 1.  As part of the service, a vendor is part of the delivery and costs $20.  However, that vendor does not bill us until the 1st of the next month (month 2).

Did we owe the vendor in month 1?  Was the profit margin on the service really 100% in month 1?  And a $20 loss in month 2?  (Yes, no, and no).  By taking the proper bookkeeping techniques, we can capture future obligations and apply the matching principle to state the proper margins.

Balance Sheet Reconciliation

Over time, as businesses grow and the nature gets more complex, the balance sheet can often be a proverbial dumping ground unless there is love through periodic reconciliation.

By illustration, bank accounts are easy.  Our accounting system shows $100,000 in account 1001 and our bank statement shows $100,000.  This is the 101 of bookkeeping.

However, other liability accounts become a graveyard of poorly documented month-end journal adjustments, mis-classed transactions, or naïve ‘placeholder’ entries.  A balance sheet that becomes bloated often misrepresents the profitability of the company, much less its liabilities.  Too often, a balance will sit (or worse, grow) year-after-year without support, only to realize that the asset or liability was not real.

Even worse is that of show a negative liability balance.  On occasion we may find that a vendor actually owes us a credit for an overpayment, however, the instances of a negative liability should be fairly rare.  Yet, many small businesses have balances like this that persist for years.

Another area are fixed assets.  Autos, real estate, and furniture are examples that can sit on the balance sheet for years without the appropriate depreciation.  You may have bought you 1990 Supra for $90,000, but 30+ years later, it is no longer worth that much and should have been depreciated. In some cases, fixed assets are overlooked and sometimes disposed of without writing it off.

Actively *proving* out the balance sheet is a key exercise – minimally annually – by a bookkeeper.  Certain accounts need a more frequent refresh given the volume of transactions and/or magnitude.

Meta Data

The accounting software captures information on a detailed basis.  Various ‘attributes’ are able to illustrate details about the business that, when analyzed and presented, can create decision-making.

If we revisit cash-based accounting, seeing a check hit the bank from our biggest client triggers revenue.  We can simply mark this as ‘sales’, ‘income’ or ‘revenue.’  And for some small businesses, this is ok.

However, as the business grows, the sales has different characteristics.  We may sell multiple products or services.  We may sell to different types of customers.  We may have different ways of selling.  There may be key information that we want to filter and analyze relative to our cost or marketing spend.

Having a disciplined approach to the data is key so that this meta data can be harvested out of our accounting systems to generate information.  Following consistent transactional entries and processes allows for a clean data set for evaluation, such as a trend analysis.

Documentation and Archiving

Documentation and detailed support are a bookkeeper’s best friend.  Being able to trace a transaction or a journal entry often can be the difference between a tangled mess to unwind or a clarification of an assumption set that is easily explained.  This idea becomes truer if there has, or will be, turnover.

For each journal entry, documentation (a calculation, a memo, and explanation) should be attached to the journal entry in a self-evident manner.  While this seems basic, too often an entry will carry a simple not of ‘per <insert name>.’  Unless one has ESP, this is not adequate documentation.

As well, cloud-based archives or secured repositories of data create continuity in the event of local machine damage or if employees resign.


Most bookkeeping can be done remotely and with access to the Company’s accounting software, bank accounts and credit cards.  However, certain transactions may not be clear as to the nature of the expenditure.  A deposit or withdrawal from the operating account may not be understood due to the lack of information.

Communicating with the Company to get clarity is important.  Asking who the vendor is or the rationale of a certain expense is a healthy exercise that can be overlooked.

Value Proposition

Deconstructing the above, we find that poor bookkeeping can – at best – lead to misleading information.  Alternatively, bad bookkeeping can lead to an understatement of liability, leading to surprises in cash flow.  Then broadly, if transactions are booked inconsistently – whether the meta data is miscategorized or the timing is a laggard – decision-making is skewed which may result in investment in sub-par areas or cutting in areas that are highly profitable.

As an owner and/or CFO, it becomes very difficult to interpret financials and exercise good judgment if the numbers are inaccurate.  If there are errors, it is distracting, but also casts doubt as to what else may be wrong with the information being submitted.  Instead of moving the business forward, senior leaders are dragged into a ‘What happened?’ mode and a path leading way off the strategic mission.

In the end, the value proposition of good bookkeeping is that of financial integrity.  Investing in a quality bookkeeper does not typically track on the top 10 list of owners/entrepreneurs, but having the confidence that financials are done accurately in not inconsequential.  If each month is closed properly, the published results allow for information (financial statements) to enable decisions.  Conversations and related decisions can be concentrated on cash flow, profitability, and personnel.  Third parties (e.g. banks, potential buyers) can rely on the financials for financing or M&A decisions. Financials can be presented to the CPA that the income is fairly stated, avoiding amended returns, penalties, and interest.  As a business grows, good bookkeeping becomes a key staple in the value delivery chain, essential to owners, executives, CFOs, and other key stakeholders to perform their roles.

Red Flags

  • Is there a static balance year-over-year?
  • Do I have a negative liability?
  • Do I have a negative asset?
  • No accounts payable or accrued liabilities
  • Growing balances that do not match historical patterns or current growth rates, such as:
    • ‘Undeposited funds’
    • A/R Aging ‘buckets’
    • Negative A/R balances
  • Fixed assets without accumulated depreciation schedules
  • Interest expense without a loan balance in liabilities
  • Are transactions deleted or voided?

 Good Hygiene

  • A close calendar
  • A checklist
  • Close out each month
  • An established distribution list for financial statements/management reports
  • Document, document, document
  • Save work papers, memos, support, information
  • Reconcile balance sheet accounts supported through detailed information
  • Compare actual results to the monthly budget (operating plan)
  • Annual alignment with CPA on book-to-tax adjustments
  • Rolling equity balances at year-end to have a clean, opening retained earnings balance


Aaron Jaeger