13. Daily Account Balances

In the preceding post, the production of a trial balance on a daily basis was proposed. By simply using the power of the computer to add a few numbers together, a complete trial balance should be available as soon as the business transactions are recorded. It was also shown how to-date earnings and other information could be produced at little or no cost from this trial balance.

A trial balance, however, has the formality of being part of the official quarterly report preparation process and, since we are just trying to get critical information quickly to the company’s executives, we get dispense with formalities and just talk about producing real information on a real-time basis. Balance sheets, trial balances, and income statements aren’t as important as the information contained in them, and we can produce that information as easily as the dashboards in our car produce current information about speed and mileage. There is no reason why every detail of a company’s financial data could not be made available to corporate leaders on a daily basis.

The general ledger is made up of accounts; each account has entries in it that represent deposits (debits) or withdrawals (credits); and each account has a balance that represents the sum of the deposits and withdrawals. The account balances of the general ledger are really all that is needed to easily produce the information found in the formal GAAP reports.

Because this is the twenty-first century, we can assume that the general ledger is automated and that the entries in each account are recorded by a program. As easy as it is for the program to record the entry, it can also keep the running balance of the account, adding a ten dollar debit entry could automatically update the running balance ten dollars in the debit direction. An automated running balance means that the balance of every account in the General Ledger (representing all of the financial data in the company) is available to us as quickly as the data is posted.

This means that for any company large enough to have its bookkeeping on a machine of laptop power or greater, the account balances should be always available. The account balances are the details of the trail balance that was discussed in the previous post, so we are essentially where we were in the previous post, having the ability to present all of the critical GAAP quarterly report information to executives on a daily basis (see previous post).

More essentially, it can be shown that if we have the account balances available to us, it is simply a matter of grammar school arithmetic to produce totals of assets, liabilities, revenues, expenses, and earnings (revenues less expenses).

Quarterly reports can be converted into real-time dashboard information by simply performing trivial arithmetic on the ledger account balances that should be available and current at any point in time. Greater sophistication can be made real-time by making accrual entries daily (this will be the subject of a later post).

12. Daily Balance Sheet

In the preceding post, I proposed, as a thought experiment, the daily closing of the books, allowing for a computation of the earnings reports on a daily basis. Let us extends that thought experiment a little further and propose that a balance sheet, summarizing the financial position of the company, be produced on a daily basis.

With modern automation, all of the arithmetic of producing a balance sheet should take only moments and be relatively costless. It can be set to go off automatically, immediately after all of the day’s transactions are posted. To make the job easier, let us propose that we do not even have to close the books to prepare the balance sheet. We can, for example, obtain our up-do-date financial position from a daily “trial balance.”

The trial balance will give us an intact summary of critical parts of our financial position. For example, directly from the trial balance, before any accounts are closed, we can obtain the amount of the assets broken down by category. An accurate summary of all liabilities would also be available directly from the trial balance. What would be missing from the trial balance would be earnings information. For the earnings data to be directly in our balance sheet the closing operations would normally be performed, turning our trial balance into a true balance sheet.

However, our daily trial balance would include the balance of every account in the ledger and a complete and accurate earnings summary could be produced in milliseconds by simply adding the balances of the revenue and expense accounts together. Therefore, in effect, our trial balance could produce all of the information in a true balance sheet as well as the earnings data normally found in the income statement, without the closing of the books.

In summary, all of the data found in quarterly reports could be generated on a daily basis by simply summing the balance of each account and putting it into a trial balance. This, of course, could be done without closing the books. The key to producing real-time financial data in the age of automation is to simply allow a trivial computer program to perform addition on ledger accounts each night as soon as the day’s transactions are recorded.

11. Daily Closings

Let’s consider the idea of closing the general ledger on a daily basis. I propose this idea as a thought experiment only, intended to open minds to new ideas and perhaps provoke further discussion. This is not suggested as the optimal solution on maximizing financial information available to corporate decision-makers

The closing of the books involves summing up the so-called “temporary accounts” (revenue, expense, and dividend accounts) and transferring their balances to the retained earnings account. This is typically done at the end of a business period, allowing the bookkeeper to determine the earnings for the period and leaving these temporary accounts with a zero balance to begin the next period accumulating new earnings data.

Since most corporations use the closing operations to prepare their income statement and other periodic reports, the closing operations determines the reporting period. Valid reports are only available after the period’s closing operations and the only reported metrics available are for the period itself. It is hard to imagine how important financial information is reported in such a limited and rigid manner in today’s age of automation, but the method was designed in the middle ages when addition was done with beads and the practice has been dogmatically accepted as necessary regardless of the mounting evidence of its archaic absurdity.

If we choose to continue the process of closing the books before preparing the reports, let us now consider amplifying the amount of information available and increasing its timeliness by closing the books every day and then producing earnings reports for each day.

Since we are working with computers, the closing operations can be easily automated to kick-in at midnight each day and run at little or no cost to the company to summarize the day’s activity. This means that every day the people who run the company could have daily earnings statements as well as more detailed reports on specific types of revenues and expenses. The effects of marketing plans, weekend sales, and work interruptions could be easily gauged just as they happen, allowing the alert helmsman to adapt his company by quickly making necessary corrections and adjustments.

But, if the temporary accounts begin each day with a zero balance, how would a company ever be able to produce a quarterly earnings report? Simple, the earnings for one week is the sum of the earnings for each day of that week; the earnings for a given month is the sum of the earnings for each of its days; and the earnings for a quarter can easily be produced by summing the appropriate daily reports.

Therefore, there is no reason why account closing must await the end of a fiscal period. For the company unwilling to forego the whole wasteful process of closing the books, the process of doing daily closes is a simple way of freeing financial information from the limitations of a rigid fiscal period.