Learn It
Financial statements are not just reports you produce at the end of the month. They are also a diagnostic tool. An experienced bookkeeper can look at a Balance Sheet and a P&L and spot areas that deserve investigation — often before they look at a single transaction.
The key principle is this:
The financial statement tells the bookkeeper where to look. It does not always tell them what caused the problem. That requires investigating the supporting detail — the account register, the reconciliation, the customer or vendor detail.
Warning Signs to Watch For
Here are the most common warning signs a bookkeeper looks for when reviewing financial statements:
Negative Cash
Cash should never be negative. If it is, something is wrong — usually a missing deposit, a duplicate payment, or an overdraft that was not recorded.
Negative Accounts Receivable
A customer overpaid, a payment was applied to the wrong customer, or a credit was entered without a matching invoice. See Accounts Receivable.
Negative Accounts Payable
A vendor was paid before the bill was entered, a bill was entered twice, or a vendor credit was recorded incorrectly. See Accounts Payable.
Large Undeposited Funds or Clearing Account Balance
These accounts should normally return near zero. A growing balance means transactions are being parked but not moved to their final destination. See Clearing Accounts and Undeposited Funds.
Loan Balance That Never Changes
If the business is making payments but the loan balance does not decrease, the principal portion of the payments is probably being recorded as interest. See Loans and Debt.
Unusually High or Negative Expense Accounts
An expense that triples suddenly may be a misclassified asset. A negative expense may mean a refund was recorded incorrectly or a correction was entered in the wrong direction.
Duplicated Revenue
Revenue that is much higher than expected may mean a customer payment was recorded as a new sale instead of reducing Accounts Receivable. See Bookkeeping Errors.
Unusual Owner Equity Balances
Negative equity may mean accumulated losses or owner draws recorded incorrectly. Large unexpected equity changes may mean owner contributions or draws were not properly recorded. See Owner Equity.
Large Changes Between Months
Any account that changes dramatically from one month to the next deserves a look. It may be correct — or it may be a sign of an error.
How a Bookkeeper Thinks
When an experienced bookkeeper reviews financial statements, they ask three questions in order:
- What looks unusual? Which balances are negative, too large, too small, or unchanged when they should be changing?
- What could explain it? What kind of bookkeeping error or situation could produce this balance?
- What supporting detail should I inspect next? Which register, reconciliation, or report will confirm or rule out the explanation?
The bookkeeper does not jump straight from unusual balance to correction. They investigate first. See Bookkeeping Errors and Cleanup Bookkeeping for more on the investigation process.
Do It
Below are 5 suspicious balances from a set of financial statements. For each one, inspect the supporting detail and determine the likely bookkeeping issue.
Do It — Bookkeeping Detective
Below is a Balance Sheet and P&L containing several suspicious balances. For each one, identify the account that needs investigation, review the supporting detail, and determine the likely bookkeeping issue.
A strange balance is a clue, not a diagnosis. Investigate before you conclude.
Clue 1 of 5
Accounts Receivable
Step 1: What should you inspect next?
Before jumping to a conclusion, you need to look at the supporting detail. Click below to reveal what you find when you open the account register.
Prove It
Answer each question, then read the explanation. There's no score — this is just to help the ideas stick.
Question 1
A bookkeeper sees a negative Accounts Receivable balance on the Balance Sheet. What does this mean?
Question 2
A bookkeeper notices that the loan payable balance has not changed in six months, even though the business has been making monthly payments. What should they investigate?
Question 3
What is the correct way to use financial statements when diagnosing bookkeeping problems?
Key Takeaways
- A strange balance is a clue, not a diagnosis.
- Financial statements show you where to look — not what went wrong.
- Negative cash, negative A/R, and negative A/P are always warning signs.
- Loan balances that never change may mean principal is being recorded as interest.
- Large clearing account balances mean transactions are parked but not moved.
- Sudden expense spikes may mean a capital asset was recorded as a repair.
- Always investigate the supporting detail before recording a correction.