Post #2 of 4 in a series of posts about financial records. See the bottom for a list of the 4 posts.
An important concept in keeping good financial records is the notion of reconciling. Reconciling involves three things:
- beginning balance sheet
- ending balance sheet
- statements summarizing transactions that occurred in the period between the beginning and ending balance sheets
Transactions in the period between the beginning and ending balance sheets can be summarized in three areas:
- operating transactions (e.g., income and expenses)
- financing transactions (e.g., incurring or repaying debt)
- investing transactions (e.g., acquiring or disposing of capital assets)
The concept of "transaction" includes more than just cash transactions. For example, the purchase of something on credit is a transaction and needs to be entered into your financial records at the time the transaction occurs even if there isn't any exchange of cash at that time.
If you can take your beginning balance sheet, apply the transactions for the period, and come up with your ending balance sheet, then your financial records reconcile.
Having financial records that reconcile does not guarantee that they are correct, but it's a good start. If your financial records do not reconcile, it's certain that there is a mistake somewhere. Either one or both of the balance sheets is incorrect, or there are missing or incorrect transactions in your records.
This is part of a series of 4 posts on this subject:
Financial Records - Letter to Members
Financial Records - Reconciling
Financial Records - Cash vs. Accrual
Financial Records - How good?
