Question

The Balance Sheet as an Investor’s Tool

You know that both internal and external users have not only the short-term success, but also the long-term success of the company at the forefront of their minds. One way that users determine short-term and long-term success is by use of the Balance Sheet. On the Balance Sheet a user may look at Retained Earnings along with the portfolio of assets displayed and compare that to the liability side of the Balance Sheet.

What are the major limitations of the balance sheet as a source of information, and how can your role as an accountant ensure that the information presented does not include errors? How would you support your claims?

Answer 1

The below are the major limitations of the balance sheet as a source of information;

• Despite the fact that the accounting standards (domestic and/or international) are introduced to help the businesses to produce the reliable and more relevant information however this has been proven a limitation in many cases. The introduction of strict instructions by the accounting standards might not be a solution for every situation and might push the business to report and/or record something which is not that much meaningful as it should have been.
• The Balance sheet standalone do not provide all of the information needed and the user might have to refer other financial statements for various ancillary information such as in order to conduct the ratio analysis the user need figures from other financial statements as well.
• One more significant drawback is that, although the Balance sheet does list down the asset that the business has in a particular but it does not tell the user how much money these assets can generate in the future. It can only be anticipated by the user based on past date because the information available in balance sheet is based on the past data.
• The Balance sheet record and/or report most of the values on historical cost basis which means the item is recorded and/or reported on the basis of valuations conducted when the transaction/event took place instead of the current basis of valuation. Therefore, information could be too old to be used as relevant and reliable for decision making purposes by the user. This might limit user ability to understand the current worth of the business.

For the below reasons my role as an accountant ensure that the information presented does not include errors and the below points also include the reason support my claims;

• The balance sheet is generally used to analyse data that provides the information about what the business owns and what it owes. This owning and owing includes everything from the scratch of the business until the current stage. So, this data has significant importance and at the same time it is very crucial information. Therefore, a small error in entering the data in the balance sheet can affect the balance sheet in massive drastic way. This error could be as simple as incorrect decimal use, for example- an amount $1999.99 entered as $19999.9. Also, it could be exchange of digit such as an amount $96969.99 entered as $69696.99, not entering accurate currency rate, etc are some of the most common and frequent errors. When as an accountant we make thousands of entries of these small and big values in numbers on the balance sheet spotting such minor error will not be easy, but their effect may not be so minor. So, as an account I should be cautious and wide awake while preparing the balance sheets.
• This is rare error in accounting nature but it does exist. An arrangement of data in the balance sheet in the actual sequence of their occurrence is most important but many of the accountants have missed on this part of following sequence while arranging data in balance sheet. The random entry of data in the balance sheet not only makes it illegible for some of the user, but also the chances of missing some of the data are increased drastically.
• Although updating the sheet instantly is not always possible, but keeping the receipts, bills and any record of transaction safely becomes very crucial to avoid such error, so that resultantly the balance sheet can be updated correctly at the earliest as possible. Waiting for the month-end or year-end closing in order to update the details is very as finding those receipts, bills and record can become difficult and could impact the quality of account keeping maintaining by an accountant. Therefore, as an accountant I should dedicated to follow regular recording of transaction as and when it took place. I will also ensure to keep records such as invoice and bills even though the transactions had been recorded to ensure the regular reconciliation at month-end and/or year-end.
• The assets listed in the balance sheet must be equal to the sum of liabilities and equity of the company. Listing an asset as a liability or liability as an asset could disturb the account equation i.e Assets = Liabilities + Equity and create a problem for an accountant. Therefore, assets and liabilities with variable prices require the accountant to be extra cautious to classify them accurately. As an accountant I should update the balance sheets on timely basis, so that I can able to work without stress to avoid various errors to ensure the quality of data recording in balance sheet.