And if you read this entire article – really read it, not just skim – you'll start asking questions that 90% of accountants (and even auditors) don't even think about in their daily work.

Why? Because most accountants are trained to record transactions. They record invoices, expenses, and calculate taxes. But they aren't taught how to "scrutinize" a business through the eyes of an owner.`

In the previous lesson, we learned that three financial statements tell three different stories. Most business owners start with the P&L: "How much profit will we make this month?". Accountants do the same: recording revenue and expenses daily - everything revolves around the P&L.

But the best people in the industry - auditors, financial analysts, investors - started somewhere else: Balance Sheet.

Basic logic that 99% of people overlook.

Think about this:

Beginning BS  +  Profit/Loss during the period  =  Ending BS

Alternatively, it can be written as: Lãi/Lỗ = Profit/Loss = Ending BS - Beginning BS.

The Profit and Loss Statement is not a "standalone" report. It is simply the difference between two copies of the Balance Sheet at two different points in time. For example, if you weigh 70kg at the beginning of the month and 68kg at the end – a difference of 2kg is the "result" of a month's diet and exercise. You don't need to count every calorie to know the result – just weigh yourself twice.

Logic is powerful:

If you verify that the opening balance sheet is correct, and the closing balance sheet is also correct – then the difference (= Profit and Loss Statement) will automatically be correct. This is the logic auditors use to check millions of transactions without having to look at each one individually.

And here's the interesting part: you don't need to be an auditor to use this logic. You just need to understand it and apply it to your business.

This is one of the most important insights in this article.

P&L can be manipulated through "timing".

Accountants can legally (or illegally) “adjust” the P&L by changing the timing of recognition:

•       Recording revenue earlier than it actually was (revenue recorded before goods were delivered) → The P&L statement looks better.

•       Deferring expenses to the next period (expenses incurred but not yet recorded in the books) → inflated profits. phồng

•       Changing the depreciation policy (depreciating more slowly to reduce annual costs) → higher profit on paper. 

BS is different: each item can be verified independently.

This is the power of the Balance Sheet: every line on the BS has a “truth” that can be verified and reconciled.

You see? Every line on the balance sheet can be "touched," "counted," and "questioned." Money can be reconciled with the bank. Goods can be inventoried. Debts can be questioned with the creditors. But with the P&L – how can you verify whether "this month's revenue is 500 million" is correct or not, other than trusting the recorded figures??

This is the rationale behind the Balance Sheet Approach: instead of examining millions of transactions on the P&L, auditors examine the "snapshots" on the balance sheet – because snapshots can be compared to reality, while the "story" on the P&L cannot.

Let's go back to Minh's story from the previous post. At the end of the year, Minh hired a CPA to prepare his tax returns. The CPA sent Minh a set of financial statements and said, "The net profit is 150 million, Minh."

Minh thanked him, and then... did nothing with it. Just like 99% of other small business owners.

But if Minh knew about BSA, he would examine that report himself and discover many things:

Step 1: Check the Money – “Does the account balance match the bank statement?”

There's a 2 million VND discrepancy in Shopee wallet. Why? It could be an unrecorded return. It's a small amount – but if left unchecked, it will accumulate into a large sum.

Step 2: Inventory Check – “Does the item actually exist? Is the value correct?”

The balance sheet shows inventory at 300 million. Minh conducted the inventory check and discovered:

Difference: 65 million. On paper, Minh has 300 million worth of inventory. In reality, it's only 235 million. This means the 150 million profit reported by CPA is also incorrect – the actual profit is only about 85 million.

Note: This is an extremely common mistake made by e-commerce sellers: recording inventory at purchase price, but never reassessing its true value. Outdated, expired, returned goods – all remain on the books as “assets.” But in reality, they are junk.

Step 3: Check Accounts Receivable – “Who owes me money?”

The balance sheet shows accounts receivable of 80 million. Minh reviewed it:

•       Unpaid Shopee payment: 45 million VND (will be received within 7 days)

•       Unpaid TikTok Shop balance: 20 million VND

•       Amount owed to agent A: 15 million VND – overdue for 6 months, no contact possible (likely lost).

So the actual receivable is only 65 million, not 80 million. Plus another 15 million in "fictitious assets" on the books.

Step 4: Check Accounts Payable – “Who do I owe money to, and how much?”

The balance sheet shows a payable of 360 million. Minh checked and found:

•       Debt to Korean suppliers: 150 million

•       Bank loans: 200 million

•       Unpaid taxes: recorded as 10 million, but CPA undercalculated personal income tax → actual tax is approximately 18 million

Actual debt: 368 million. The debt is 8 million more than what is recorded in the books..

Step 5: Recalculate Equity – “How much do I actually have?”

Equity = Real Assets – Real Liabilities

The CPA said the equity was 270 million. In reality, it was only 180 million – a difference of 90 million, or one-third!

Minh didn't need to study auditing to do this. He just needed to: reconcile cash with the bank, conduct an inventory check, review accounts receivable, and check taxes. Five simple steps, but they accomplished something the CPA wouldn't do for you.

This is a technique used by professional auditors, but it's extremely simple in essence:

Example 1: Checking interest expense

CPA reports interest expense for the year as 22 million. My own check:

Average loan balance for the year: ~200 million. Interest rate: 10% /year.

Estimated interest expense: 200 million x 10% = 20 million. CPA reports: 22 million → Difference of 2 million – reasonable (due to interest rate changes during the year).

Example 2: Checking cost of goods sold

CPA reports cost of goods sold as 360 million. Minh used the Balance Sheet to prove:

Beginning inventory: 120 million VND + Goods imported during the year: 480 million VND (according to the ledger of payments to suppliers + ending supplier debts) - Ending inventory: 300 million VND = Estimated cost of goods sold: 300 million VND. CPA reported: 360 million VND → Difference of 60 million VND. Needs to be checked again!

CA difference of 60 million VND is very large. It's possible the CPA recorded the cost of goods sold incorrectly, or there are lost/damaged goods that haven't been recorded. A simple question based on the BS has uncovered a problem that you would never see if you only looked at the P&L. 

There's a famous story in the financial world: when asked, "How do you read financial statements?", legendary investor Warren Buffett said he always flips straight to the Balance Sheet before looking at anything else.

Why? Because Buffett understands something many people don't:

The P&L tells you a story – it can be good, it can be bad, it can be true, it can be false.

The Balance Sheet shows you the evidence.

More specifically, when looking at the Balance Sheet, Buffett looks for:

•       Cash: Does the company have enough money to sustain itself? Or is it racing against cash flow?

•       Debt/Equity: Whose money is the company using? Owners' or creditors'?

•       Intangible assets: How many assets are "real" (cash, goods, land) and how many are "virtual" (goodwill, brand value)?

•       Trend: Is equity increasing or decreasing over the years? Increasing = the company is creating value. A decline = the company is "eating into capital."

For small business owners, you don't need to analyze like Buffett. But the mindset is the same: don't believe the story – check the evidence.

Not to mention large-scale fraud. Even in small businesses, many "mistakes" happen daily that business owners are unaware of:

Common denominator: every "false story" on the P&L leaves a trace on the Balance Sheet. Because double-entry accounting requires every transaction to be recorded on both sides. If you're "inflating" revenue, the money has to appear somewhere on the balance sheet (fictitious accounts receivable, fictitious assets). And that's where to catch it.

This is the most important practice. At the end of each month, spend 30 minutes asking yourself these 5 questions:

Question 1: Does the money in the books match the money in the bank?

How to do it: Open the banking app, check the balance in your exchange wallet, and compare it with your records. If the difference is > 1% → investigate immediately.

Question 2: Does the inventory in the books match the actual inventory?

How to do it: Conduct an inventory of the main product groups. Specifically: mark dead inventory (> 3 months unsold). Number of dead inventory x number of months = amount of money "tied up."

Question 3: Who owes me money? Is it recoverable?

How to do it: List all accounts receivable. Items overdue > 30 days → yellow warning. Overdue > 90 days → red warning.

Question 4: Who do I owe money to, how much, and when do I have to pay?

How to do it: List debts to suppliers, bank loans, and unpaid taxes. Compared to the number of books. Note: with the new regulations (Decree 117), the e-commerce platform has deducted taxes – check if the tax paid matches the revenue.

Question 5: Did equity increase or decrease compared to the previous month?

Method: Actual assets - Actual liabilities = Equity. Compared to the previous month. Increase = the business is creating value. Decrease = it is declining.

1. P&L is the story, BS is the evidence – never believe a story without checking the evidence.

2. Every line on BS is verifiable – compare cash, inventory, and debt with the creditor.

3. You don't need to be an auditor – just 5 questions and 30 minutes each month, and you've done 80% of the auditing work.

4. Equity is the compass – it increases = you're creating value. It decreases = you're eating into capital. It's that simple.

Next Article: What is Finance? Why do we still need finance when we have accounting?

Accounting • Tax Consulting • Finance for E-commerce & SMEs