I was once a young auditor wrapping up audit field work for a client. My boss was a seasoned CPA and auditor, and he said we were going to thoroughly “clean up” the books during the audit for this particular client. Rather than adopting the standard auditor practice of “passing” on auditing certain accounts and discrepancies because they were “immaterial” to the overall financial presentation of the business, the manager of the business wanted us to examine each balance sheet account with a fine-toothed comb and adjust everything to the penny. This gave me an opportunity to learn a lesson that stuck with me about the essence of accounting and how to “think like an accountant.”
One of the balance sheet accounts was an asset account (classified as an “other receivable” account, as I recall) called “returned checks.” Our client was a retailer, and every once in awhile a customer would write the business an NSF check (a.k.a., a “hot check”). If the manager believed the business could collect on these checks, the bookkeeper would classify the amounts as “returned checks” that would show up as an asset/receivable on the balance sheet.
The balance of this account was fairly small, but my boss said we should look at it and adjust it to the penny. I asked the bookkeeper what the amount should be, and she realized the account on her balance sheet likely was wrong (i.e., she had not bothered to “tie it out” to the penny). She really didn’t seem interested in adjusting the amount to the correct balance, and she even attempted to make an excuse about the amount being “immaterial.” (She was apparently taking some auditing classes and learning about the auditor’s concept of “materiality,” but she must have missed the day in class when they talked about who had the prerogative to determine what was considered material. Hint: It’s not the bookkeeper.)
Finally, she gave me an amount to “write off” from the balance of that account because she thought there were some returned checks that the company would not be able to collect. I told my boss that she had given me an amount and that I was going to make an adjusting journal entry for the account.
Without missing a beat, he asked me specifically how the balance of the account should be calculated in order to determine what the adjustment should be. He was trying to get me to consider my source of information. Rather than relying on a “made up” number from the bookkeeper, he wanted me to dig deeper and ask specifically for a listing of the returned checks that the company believed it could collect from customers. And then, if we deemed it necessary, we could have dug deeper into the payment history of the patrons who wrote those checks to make a judgment about whether we believed the amounts would ultimately be collectible. (In one case, the patron had skipped town so we had a high level of confidence that his check would be forever uncollected.)
My boss gave me a memorable line: “We’re in the balancing business.” He meant that we needed to have clear, documented source material that would “tie” to the amount on the balance sheet for that account. We couldn’t take a made up number from the bookkeeper and adjust the account by that amount when we could not prove what constituted the ending balance as of the balance sheet date.
My next job after working for the CPA firm involved “assistant controller” work in which I had a similar process every month of reconciling each balance sheet account. At any given time I could point to my reconciliation spreadsheets to show exactly what made up the balance in each account. I did not merely balance the bank account and move on; every asset, liability, and equity account had a detailed reconciliation sheet (or in the case of inventory, receivables, and payables, we had summary and detail listings of each account so that we could tie the ending amount on the reports to the accounts on the balance sheet).
In summary, accountants are in the balancing business. Every number within the accounting system must “tie out” or “reconcile” to other elements of the system. By its very nature, double entry accounting requires balancing. And accountants develop tools, such as reconciliations, for checking their work and ensuring accuracy regarding every detail of the system.