Balance sheet continuity

What it means

Balance sheet continuity is the principle that the closing balances of balance sheet accounts on the last day of a period must exactly equal the opening balances on the first day of the next. One year's balance sheet flows seamlessly into the next.

Technically it is ensured through the closing accounts: when closing the books balances are transferred to the closing balance account, and when opening the new year the same amounts come from the opening balance account.

The principle follows from the Accounting Act and is a precondition of a true and fair view. Without it, assets and liabilities could be changed unnoticed between years.

How it works in practice

When taking over the books from another accountant, checking continuity is the first step. The approved balance sheet from last year is compared with the opening balances in the software, and every difference must be explained.

When moving to new accounting software, opening balances are transferred manually or by export, and this is where most errors occur, such as missing sub-ledger detail or wrongly carried-over accumulated depreciation.

If a prior-year error is found after the financial statements have been approved, it is not fixed by changing opening balances. The rules for correcting prior-period errors are followed so continuity is preserved.

What to watch out for

Unapproved or repeatedly corrected financial statements break continuity and invite detailed scrutiny in a tax audit. Changes after a return has been filed must go through an amended return and be documented.

Watch for differences between sub-ledgers and the general ledger. The total of open receivables in the sub-ledger must agree with the opening balance of account 311, or last year's error carries forward.