Exploring the Numbers on the Balance Sheet
Looking at a balance sheet can give you an idea of how a business is doing financially, but there are balance sheet limitations. Recently, when I purchased a new business, the balance sheet certainly didn’t reveal everything I needed to know.
For example, under the asset side of the balance sheet, a number of $15,000 was listed in account receivables. If I would have assumed by purchasing this business that I would be getting that $15,000 in accounts receivables, I would have assumed incorrectly. In fact, a review of the accounts receivable journal showed me that only $2,000 of that $15,000 was current and the rest of those dollars were over 120 days past due, or basically non-collectible.
When I examined the inventory account on the balance sheet, it showed an inventory of over $100,000, however, it didn’t reveal that of that $100,000, $80,000 was owed to the vendor so I would be assuming that liability. First I investigated the $150,000 listed on the balance sheet in the accounts payable account. Next, I looked at the accounts payable journal to discover the $80,000 still owed to the vendor as provided by journal entry detail.
Journals provide accurate detail for each account listed on the balance sheet. For example, a company may show short-term notes payable on the balance sheet for $50,000. To find out exactly what that $50,000 represents, you need to explore the journal for short-term notes payable. That $50,000 may be owed to one, two or even three different banks or financial institutions.