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Making a balance sheet that balances
It appears that one of the most difficult things to do, for many financial model builders, is to include a balance sheet that remains in balance without 'cheating'.
The techniques used to make your balance sheet balance are relatively simple, and the discipline that a balance sheet imposes, gives the model an internal check on its
integrity.
I always recommend building in a balance sheet early in the model build process, and checking it after each change, to ensure that you have not left out an important element of your calculations.
Three elements to each transaction
In any financial transaction (eg a sale to a customer) there are basically three elements that affect the financial statements. The first is the accrual ie when the transaction is recognised – this is what goes into the profit and loss account. When you sell something, you recognise the value of the sale immediately, even if you don't receive the cash for several weeks. The second element is the cash, which is concerned with the actual transfer of funds, (eg when the bill is settled). The third element is the debtor or creditor,
which is the difference between the accrual and the cash, and remains on the balance sheet until (in the above example) the cash position has 'caught up with' the accrual position.
Example of a debtor schedule:
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