If assets and liabilities do not equal each other in a balanced state, it means there is an error in the accounts, and it is necessary to identify and correct the mistake. The balance in an annual financial statement must always follow the principle that assets equal liabilities. This principle is known as the "balance principle," and it is fundamental in accounting.
There are several possible reasons why assets and liabilities do not match:
Errors in accounting entries: This may include bookkeeping errors, such as missing entries or incorrect amounts. It is important to carefully review the accounts to find and correct such mistakes.
Unidentified transactions: Some transactions or entries may have been overlooked or forgotten, leading to an imbalance in the balance sheet.
Missing documentation: If documentation for certain transactions or entries is missing, it can be difficult to determine the exact financial value.
Changes in valuation methods: If the association has changed its method for valuing assets or liabilities, this may affect the balance and require adjustments.
What should you do?
When an imbalance is detected, it is important to investigate the cause and correct the error as quickly as possible. This may require a review of all transactions and entries in the accounts, as well as collaboration with an accountant or professional bookkeeper to identify and resolve the issue.
Consequences of an imbalance
Errors in the balance sheet can have serious consequences, as they can lead to inaccurate financial information, which in turn can affect decision-making and trust in the association’s financial reporting. Therefore, ensuring that the balance is always accurate is a fundamental best practice in accounting.
