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Rollforwards - the Backbone 𦴠of Actual Accounting
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"Can you send me one of your balance sheet tracker schedules? Nothing fancy - just like us old dogs used to use." One of my clients just hired a new Controller and this was the first email he sent to me. Had to think for a second, then realized what he was asking for. "You mean a rollforward? Here's a quick one I just put together - let me know if that works," I shot back. "Hell yea - that's perfect!" was the reply. Today, we're going to jam on what I sent him π₯ - and how knowing about rollforwards makes you a better business owner, investor, or accountant. Before digging in - I want to remind you that I offer paid consultations. I have a 30 and 60 minute Calendly link that I can send you if you reply to this email. I have done calls about operating agreement language, partnership allocations, tax structuring, and CPA firm management.
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To start - here's a sample rollforward: What a Rollforward Is and When to Use ItEvery year on January 1, all of the accounts on the income statement start again at $0. But not so with the balance sheet - balance sheet accounts "carryforward" to the next year. βοΈ Think of it like your W2 restarting at $0 on January 1, but your bank balance staying the same. For employees, their W2 is like their income statement and their bank account is their balance sheet (part of it). So rollforwards primarily exist to support the changes in the balance sheet that don't reset. If you are looking at the accrued property tax liability between months or years, it's tough to tell what exactly happened. The rollforward tells you the story. π Accountants (good ones at least) use rollforwards for balance sheet accounts that require estimates, accruals, and manual journal entries. A few examples are: prepaid insurance, other assets, fixed assets, accrued liabilities, accrued property taxes, equity. We're going to keep it simple with the above accrued property tax example. How It WorksOld dogs love rollforwards because it lets the accountant verify the activity in the account without just relying on the computer to do all the work for you. Three primary inputs are changing the balance sheet account in the rollforward:
In the above example, the annual property tax expense is expected to be $24,000 - and paid every January. If this were just expensed in the month paid, you'd have 11 months that look great and one month that looks like trash. ποΈ And it's not really true accounting because that expense is building throughout the year. So my calculation at the bottom (bottom green highlight) shows the monthly accrual amount of $2,000. Every month, $2,000 of property tax expense will be recorded - and the accrued property tax liability will increase by that same $2,000. You can see that YTD in 2024, this results in $8,000 of property tax expense and a liability of $6,000. Those are different because of the timing of the payment made. In January, check #1234 is written to pay the $24,000 property tax bill. This payment decreases the amount of the accrued property tax liability, which continues to then rebuild with the monthly accrual. π½ πΌ How to Use It BestWe talked a few weeks ago about using the general ledger to analyze what's happening inside the business. But accounting systems don't intend general ledgers to be use as the optimal insight into these kinds of balance sheet accounts. So business owners and accountants alike can use these rollforward schedules to get deeper insight into what is actually happening to the balance sheet - and take steps to "audit" or verify the payments, deposits, and estimates being used. π In our example, the owner should look at if they agree with the next January estimate of $24,000. If it will be higher, then the accrual amount should be adjusted now and "caught up." They can also verify that the check payment was really made to the county by looking at their property tax account online. β Balance sheets are where all the games are played to fluff the income statement or commit fraud. Owners, investors, and accountants should spend time getting familiar with what's really happening inside them - rollforwards are the best tool for that. π«‘ π₯ Hottest Finance Posts This Week π₯β
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