The Balance Sheet - Part 2 - Incremental vs Absolute Details
The Balance Sheet Calculates COMPANY NET WORTH via TWO DIFFERENT METHODS in an effort to provide credibility to your bookkeeping data beyond that which is provided by Statement Reconciliation. It picks up on Categorization errors that can not be easily caught any other way...
We refer to the two different methods for COMPANY NET WORTH calculations as (1) "incremental" and (2) "absolute" .
When these two values are equal, the DIFFERENCE BETWEEN THEM IS ZERO, and the Report is said to be "in Balance".
The assumption is then made that the transaction categorization process that is contained in the incremental portion of the report 1) included all relevant transactions and 2) the categorization process for the transactions was done in an a proper manner without egregious errors.
HOWEVER. You know what happens if you make assumptions right?
Believing reporting is accurate because a report is in Balance is like believing the Main Stream Media for anything of relevance.
In this case, you would need to make sure no "suspended accounts" were included in the incremental reporting to get that balance to work out. If they were, you have nothing of value. you also have to assume someone actually generated the report automatically from system data as opposed to simply fabricating it in a word document or a spreadsheet.
Even if only a few dollars were allocated to a suspended account, that doesn't mean the accounting was only a few $ off. The accounting could have been off by $1M one way and $1M and $3 another, thus only showing a $3 error. This isn't hypothetical. Ask any CPA about it.
The "Incremental Method"
The "INCREMENTAL" section is the harder of the two sections to put together properly. It is the section most prone to errors. A start date and and end date is required to complete this section.
What is the "incremental method" ?
Given a start date and a starting net worth (January 1 and $100 in the example above), and given transactions in your bookkeeping system between that start date and end date ( $45 and $20 in the example above) , you should end up with the proper Company Net worth for the End date ($125 in the example above)
Below is the exact same concept, it just looks a bit different. Starting Net Worth + increases (income , paid in equity) - decreases (expenses, cost of goods sold, owner draws) results in Ending Net worth.
The "Absolute Method"
The "ABSOLUTE" section is the easier of the two sections to put together properly. Any errors are typically transcription errors. Only an end date is required to complete this section. All major media and text refer to a Balance Sheet in entirety as if it was this section only...
The absolute method can be thought of more as Gospel as errors are not typically in this section unless they are gross and they are easier to find there.
In the Example below, the first line under Assets is a Checking account and that is the balance on the report end date. Any balance in the accounting software should be easy to cross check with bank statements visually that is why this section is easier.
The Credit Card accounts are also easy because there is a third party statement to use for crosscheck just like the Checking Accounts.
If an error was made in inventory that will be harder to pick up quickly BUT there is an easy way to find transactions causing errors!!