Quick Tip #4: Accounting For Insurance
September 23, 2020
New Ruling on Title VII Protections: The HR Brief
October 1, 2020
Next Level Solutions emphasizes the importance of accurate accounting practices, especially when it comes to liabilities. Missteps in this area are common among businesses, but correcting them is simpler than you might think—and it can have a big impact on your financial clarity.
What Are Liabilities?
When you borrow money or finance a purchase, the amount you owe is recorded as a liability on your balance sheet. Whether it’s a car loan, equipment financing, or another form of credit, it’s crucial to account for payments correctly to ensure your books remain accurate.
Common Mistakes
Inexperienced bookkeepers often code liability payments as expenses on the income statement. For example, a car loan payment might be labeled as “car expense.” However, this approach doesn’t separate the two critical components of the payment:
- Principal: Reduces the liability on the balance sheet.
- Interest: Appears as an expense on the income statement.
Failing to distinguish these components can distort both your balance sheet and income statement, leading to a skewed financial picture.
The Right Way to Account for Liabilities
To maintain accurate records, ensure that the principal portion of the payment reduces the liability, while only the interest portion is expensed. At the end of each month, reconcile your liability balance with the statements provided by the lender.
Why Accuracy Matters
As we like to say, “If the balance sheet isn’t right, nothing’s right.” Properly managing liabilities ensures your financial statements reflect your business’s true position. This clarity helps you make informed decisions and demonstrates financial professionalism to stakeholders.
At Next Level Solutions, we’re here to guide you through the financial details that keep your business running smoothly. Start refining your liability management today for better financial insights tomorrow!