Sore Thumbs.... Annoyances to an EQAA
One of the most annoying and distracting pains or discomforts in life are sore thumbs. Strange to conceive as a thumb in relation to the entire body is a very small member; however, the pain that can radiate from a thumb is often considered one of the greatest nuisances in life, hence the use of the phrase along many different lines of conversation. I grew up on Skis and after hours on the slope, testing my carving and cutting, falling and fleeing down the hill, one of the most common side effects was sore thumbs. Perhaps from falling, perhaps from holding onto the poles as I leaned into the mountain; regardless, and none the wiser, sore thumbs were there to keep me awake or certainly expedite my run to the medicine cabinet to open a bottle of Tylenol with my forefingers. Well we certainly are not on an Accounting Blog to discuss sore thumbs, skiing or really anything physiological (unless you should consider our analytical capacity as physiological), so what am I getting at. Sore thumbs exist all over the Accounting and Accounting picture design realm. Sore thumbs are those items, accounts, transactions occurring or existing in the design of an Accounting picture, that are nuisances – erroneous omissions, inconsistencies, inaccuracies that stand out so much they take up all of our waking moments of thought - clearly sore thumbs. At least to a high level, analytical accountant sore thumbs in the world of accounting are very real, and even though they can be small in relation to the overall financial picture of an entity (just like sore thumbs), they too can be very annoying and troublesome. Unfortunately sore thumbs are not as obvious to everyone as they should be or at least to an experienced, qualified and analytical Accountant or EQAA. [ An Accountant needs experience – years of experience confronting and designing accounting pictures – Qualifications – A solid understanding of Accounting principles and Analytical – A capacity to see the forest while working amongst the trees.]
While skiing may develop sore thumbs- different misstatements, mistakes, omissions, errors (sins of accounting commissions) also create sore thumbs in Accounting.
What are examples ?
Abnormal Account Balances: Each account or group of accounts in an entity’s Accounting Picture will have (or should have) a normal account balance. That normal account balance is either negative or positive and as accountants, we further refer to each balance as having a normal Debit or normal Credit balance. We are not discussing the reasonableness of a balance within this post, but rather the irresponsibleness of a balance when one is not “normal” and presented on a statement.
What do I mean ? I hear your questions even in advance of posting this blog.
Let me break it down a little bit more. A company’s accounting picture is designed by the financial transactions of the company as it passes through its ordinary revenue cycle. Those financial transactions sum to a certain balance – which by accounting standards should be a normal balance of either a Debit or Credit balance. For example, Assets – have a normal Debit balance. An asset is something of value and as Debit entry increases an Asset – so should the ending balance of the asset or all assets be also a Debit balance. The same holds true for other accounts. Such as Liabilities are normally credit balances; Revenue is a Credit Balance and Expenses are Debit Balances. You should have noticed that I left off Equity. Equity SHOULD have a credit balance, yet many factors including years of losses, treasury stock repurchases or other contra-equity transactions could cause Equity to easily be reported as a Debit balance and not be abnormal. I like to say that Equity errors are not sore thumbs – they are much worse – like the broken leg in skiing. Although each account type has a normal balance, often these account or subaccount balances fall in error as abnormal – though it is up to us as Accountants to find them and resolve them. Further, for example, Accounts Receivable – should be a debit balance as an asset. Common sore thumbs are finding this balance to be a credit balance – ordinarily the result of missed invoice – a prepayment –deferral of revenue or the like. An experienced, qualified and analytical accountant is needed to discover and find these sore thumbs.
An accounting picture is great when the picture is not smudged with errors or omissions. Sore thumb 1: Abnormal Account Balances.
Sore thumb 2:
Sins of Omission
Missed Accruals or Expenses:
Misclassified transactions: ( Perhaps requiring the most analytical capacity in recognizing this sore thumb – to an EQAA – the ache will radiate excruciation throughout the entire body – until resolved.