When I open a set of financials for the first time, I look at the balance sheet before I look at anything else. Not because it tells me the most — because it tells me whether I can trust anything else.
A clean balance sheet is the foundation the whole financial picture rests on. And a surprising number of them — prepared by real bookkeepers, reviewed by real accountants, filed with real tax returns — have problems. Not fraud. Just errors that accumulated because nobody was catching them.
Here's what I look for.
The Five Most Common Errors
| Error | What Breaks | How to Spot It |
|---|---|---|
| Depreciation missing or wrong | P&L overstates profit; assets overstated on balance sheet | Fixed asset balances unchanged year over year |
| Credit cards off-book | Liabilities understated; balance sheet incomplete | Compare balance sheet credit card line to actual statements |
| Loan payments coded wrong | P&L shows wrong expense; loan balance never decreases | Compare loan balance to original amortization schedule |
| Retained earnings don't reconcile | Equity section unreliable | Beginning RE + net income − distributions ≠ ending RE |
| Negative balances where they shouldn't be | Entries recorded in wrong period or category | Negative cash, negative A/R, negative inventory |
The Details on Each One
1. Depreciation Is Missing or Wrong
When you buy a $60,000 truck, you don't expense it all in year one. You depreciate it — say $12,000 per year over five years. The expense hits the P&L annually. The balance sheet shows the truck's value declining by the same amount each year.
When depreciation isn't recorded, two things go wrong at once:
P&L: Profit is overstated — you're not showing an expense you actually have.
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Balance Sheet: Assets are overstated — equipment shows at original cost forever.
How to spot it: Look at your fixed asset balances. If they're the same number year over year, depreciation probably isn't being recorded.
2. Credit Cards Off-Book
A business owner uses a company card all month. The bookkeeper records the individual transactions when the statement is paid. But the card balance never shows up as a current liability.
The P&L looks right. The balance sheet is wrong — liabilities are understated by whatever's sitting on the card. If you're running $30,000–$50,000 on a business card, that's a meaningful distortion.
How to spot it: Pull your balance sheet as of month-end. Compare the credit card liability balance to your actual statements. If they don't match, entries aren't being reconciled correctly.
3. Loan Payments Hitting the Wrong Line
When you make a loan payment, two things happen:
| Portion | Where It Goes |
|---|---|
| Interest | Expense on the P&L |
| Principal | Reduces the loan balance on the balance sheet |
What often happens instead: the entire payment is coded as an expense. The result — a P&L that shows more expense than it should, and a loan balance that never goes down.
How to spot it: Take any term loan on your balance sheet. Get the original amortization schedule from your lender. Compare what the balance should be to what your balance sheet shows.
4. Retained Earnings Don't Reconcile
Retained earnings should follow a simple formula every year:
Beginning Retained Earnings + Net Income − Distributions = Ending Retained Earnings
If that equation doesn't hold, something hit equity directly instead of flowing through the income statement — journal entries, ownership changes, or distributions coded inconsistently.
How to spot it: Ask your accountant to walk through the equity rollforward. If it doesn't reconcile, that's the conversation to have.
5. Negative Balances Where They Shouldn't Be
| Negative Balance | What It Usually Means |
|---|---|
| Negative cash | Transactions recorded in wrong period |
| Negative accounts receivable | Payments entered before invoices |
| Negative inventory | Sales recorded before purchases |
| Negative liability | Entry is probably in the wrong section entirely |
None of these are necessarily catastrophic on their own. But any one of them signals a gap in the bookkeeping process — and if one section has errors, the rest of the picture is suspect.
Why This Matters Beyond Clean Books
An inaccurate balance sheet doesn't just give you a false picture. It creates downstream problems:
With lenders. Banks recalculate your financials during underwriting. If they find the errors before you do, you've lost credibility in the room.
With taxes. Depreciation errors flow directly into your tax return. Missing depreciation usually means you've overpaid. An amended return is possible, but the further back the errors go, the harder it gets.
With you. You're making decisions — hire, take that contract, buy that equipment — based on numbers you trust. If the numbers are wrong, the decisions are made in the dark.
The fix isn't complicated. It starts with someone who knows what to look for actually looking.
Next: the three ratios that tell you whether your balance sheet is healthy or in trouble.
jrbohlke.com • The Analysis