To plug or not to plug, that is the question. No plugs, no circularity: A better way to forecast financial statements

Typical textbooks on corporate finance and forecasting and budgeting recommend “closing” and matching the financial statements using what is known as a plug. A plug is a formula to match the Balance Sheet using differences in some items listed in it in such a way that the accounting equation holds. This is a very easy way to do it but it encompasses some risks. The risks are that certain numbers in the financial statements could be in error and still the plug would indicate that everything is correct because the Balance Sheet matches. In this teaching note we show how to construct financial statement without plugs and circularity.