Small Business Bookkeeping & Accounting

Small Business
Bookkeeping & Accounting

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Month End Adjustments

Now that you're sure you have the right amount of cash in your system, you're ready to check the rest of the books. How intense you get about this can well depend on what time of year it is - in a mid-year month, like March or July, you might be a little more lax about how closely you check every account, whereas at the end of the year you will want to tie every single account down exactly. Even those accounts you don't check over with a fine-toothed comb should at least be glanced at, to make sure they make basic sense. If a $3,500 car liability all of sudden turns into a $15,293 item, you'll know something is entered in the wrong place.

The process is this: go through your balance sheet, item by item. You've already done cash, and petty cash is a static account, so the next item is inventory. Check what your inventory was last month, total up what you know you've added to or deleted from it, and that should be your current total inventory. To make this easy, keep a list of what is in inventory: office supplies, raw materials, etc. Each item should have a beginning balance, an amount of current activity, and an ending balance.

If inventory shows on your books as a higher number than you actually know you have, adjust that against the material expense. If you have $250 less value in actual office supplies than you show on the books, the adjustment will be to debit office supplies (account 5550) and credit inventory. That will reduce your inventory - which will, by the way, also reduce your profitability...sorry!

When you close your books for the end of the year, you need to take actual inventory - count it all up and make sure you've really got what you think you do. At other times of the year, whether or not you go through this step will depend on how much inventory you carry. Any materials you have a large value of on hand, it will pay you to take a physical inventory of more often. Failing to do that may result in a shock at the end of the year when it turns out you've been underestimating your use of material all year, giving your perceived profitability one more opportunity to fly out the window. It's amazing how that bird can get up and go at the smallest opportunity!

This same process gets followed for each item on your balance sheet. If your books are computerized, you will find a good friend in your Detail Trial Balance and Detail Transaction Reports. These reports will show you the beginning balance for each account, what was added to or subtracted from that account over the month, and then an ending balance. This will be the easiest place for you to look for those items entered in the wrong account, items entered backwards (credit when you should debit, can you imagine?), items overlooked, or items that were transposed when they were entered, which are the top four ways to end up out of balance.

The good news is that you don't have to do this to every expense account - just check out that your asset and liability accounts are correct. If you have large loans, make sure you're accounting for principal and interest correctly - putting interest in its own account, and taking principal against the liability account. The easiest way to do this is to call the loan officer and get an actual report (loan history) of how much you owe as of this date, and make sure your books reflect that. As with any of this work, if you're talking about a small loan it may not be worth adjusting every month - you may want to adjust those once a year. The items you adjust monthly are the ones that can throw off your books by a large enough amount that it's worth the time it will take to adjust for them.

This process, completed through your entire balance sheet, will give you the assurance that your books are correct, and you can trust the bottom line on your income statement. This is actually about the first point in the process that I would actually look at the income statement - until you have adjusted your books to match physical reality, it can be relatively meaningless.