If to err is human, boy, am I human! Perhaps you can learn from my most recent error!
I was valuing a business that was owed money by a shareholder. I was asked to assume that the loan receivable was uncollectible and valueless because the debtor was bankrupt. In my financial model, I therefore reduced the loan receivable to zero. When I finished my analysis, I noted that the Company’s cash balance went up, but because of brain lock I could not see why. So I called the Company’s accountant for help.
She immediately caught my mistake and taught me a great lesson: think like an accountant in terms of double entry bookkeeping. By only reducing the loan receivable to zero, I was implicitly and incorrectly assuming that it was paid (not written off). My implicit accounting entry was: debit cash (wrong) / credit loan receivable (right). The correct accounting entry was debit shareholders’ equity (or debit bad debt expense) / credit loan receivable (ignore the tax consequences just to keep it simple). Once I made the correct adjustment, everything was cool.
Bottom line: think like an accountant and make sure your adjustments follow the proper double-entry bookkeeping!