Whether you’re a financial leader or a part of a finance and accounting team, maintaining the accuracy of financial documents is essential for your business.
So, how do you ensure that these are correctly reflected in your year-end statements?
Balance sheet reconciliation is how.
It’s a means of double-checking your accounts to catch errors early and prevent bigger problems down the road.
This article explains systematically why balance sheet reconciliation is so important and guides you through the steps to implement it effectively.
See how this fundamental process gives you a solid foundation for keeping your business on track.
Here’s what we’ll cover:
What is balance sheet reconciliation?
Reconciling your balance sheet is the process of comparing the assets, liabilities, and equity balances in your balance sheet to the supporting documentation used to populate them.
Your balance sheet can accumulate errors compared to the original information for several reasons:
- Timing differences might exist where a transaction is recorded by one party but not the other at the same time.
- Human errors during data entry are always possible.
- System errors or glitches in your accounting software can also cause discrepancies.
- Fraudulent activities could lead to intentional misstatements.
Comparing these balances to the supporting documents helps you catch these errors early, particularly if you close each accounting period on a monthly basis.
Account reconciliation confirms that your financial records are properly classified, ensuring that they are reliable.
Why is balance sheet account reconciliation important?
As balance sheet reconciliation improves the reliability of your financial records, you can benefit from:
Accuracy
Meaning the numbers in your balance sheet truly reflect your company’s financial position and cash flow.
Reconciliation helps ensure all transactions are correctly recorded and categorized.
Free of fraudulent input and errors
Safeguarding your assets and the integrity of your data.
Trustworthiness
Meaning you can be confident in the financial story your records tell and the business insights you can draw from them.
You know you are making sound business decisions based on reliable information.
Internal control
Identifying weaknesses in your accounting procedures and internal controls allows you to implement improvements that can help you prevent future errors and potential fraud.
Effective cash flow management
Balance sheet reconciliation provides a broad overview of all assets and liabilities, including accounts receivable and payable.
These directly impact your cash flow, and a clear understanding of them sets the stage for effective cash flow forecasting and management.
Beyond these practical points, reconciliation means your records seal your reputation with lenders and investors.
Regular reconciliation works to build trust among all your stakeholders, and by ensuring compliance with tax reporting rules it helps you steer clear of regulatory penalties.
Balance sheet reconciliation checklist
Performing balance sheet reconciliation is clearly good practice.
However, a consolidated balance sheet can involve a lot of documentation, with ample opportunity for mistakes.
Follow these steps for a fail-safe reconciliation process:
1. Identify balance sheet accounts
First, be sure that all relevant account ledgers are represented in your balance sheet.
The primary components include your assets, liabilities, and equity statements.
However, other common examples are cash, accounts receivable, and loan ledgers. List them all before you begin.
2. Gather important documents
The supporting documents you need to verify each ledger include:
- Bank statements for the cash account
- Invoices and customer records to support accounts receivable
- Supplier statements, credit card statements, and purchase orders backing up accounts payable
- Fixed asset registers covering property and equipment
- Inventory records outlining all stock
- Contracts with vendors confirming your prepaid and recurring expenses
- Expense reports that detail your accrued liabilities
- Stockholder records that list ownership in equity account
3. Verify that all accounts balance
This is a high-level comparison where you check that the ending balance for each account in your general ledger matches the total shown in your supporting documents.
For example, check that the cash balance in your ledger tallies with the ending balance on your bank statement.
You do this for all balance sheet accounts to get an initial overview.
4. Reconcile balance sheet accounts
This is the core of the process, where you compare each account line by line, in much more detail than when simply verifying the final balances.
For example, you match individual debits and credits in your ledger to the corresponding items on your supporting documents.
Any difference between the general ledger and the supporting documentation is referred to as a “reconciling item”, which is the formal term for flagging issues.
Here’s how it looks for the main accounts in a typical balance sheet.
Reconcile cash accounts
Check that all bank deposits and withdrawals in your bank statements match the cash receipts and disbursements recorded in the cash ledger.
Look for outstanding checks (payments you’ve made that the recipient hasn’t cashed yet) or deposits in transit (money you’ve deposited that the bank hasn’t recorded yet).
Reconcile AR
Ensure your accounts receivable records match what customers owe by checking customer payments against outstanding invoices.
Investigate past-due amounts and follow up on any discrepancies found.
Reconcile AP
You should have a supplier statement for every payable recorded.
Verify that all invoices are accounted for in the accounts payable ledger. Investigate any differences or missing invoices.
Ensure you are paying the correct amounts.
Reconcile fixed assets
Ensure all purchases and disposals are recorded and accompanied by depreciation calculations.
Verify that these calculations are correct based on the asset’s useful life and depreciation method used.
Physically verify assets periodically, if possible, to confirm their existence and condition.
Reconcile inventory
Compare physical inventory counts with your inventory records.
Investigate any discrepancies or shrinkage (loss of inventory due to theft, damage, or obsolescence).
Use inventory costing methods like FIFO (First In First Out) or LIFO (Last In First Out) consistently to value your inventory.
Reconcile prepaid expenses
Prepaid accounts include items such as insurance or rent that you’ve paid in advance.
Ensure the expense amortization schedule is accurate and verify that expenses are recognized in the same periods in which the benefit was received.
Reconcile accrued liabilities
Accrued liabilities are expenses your company has incurred but hasn’t paid yet.
Estimate these liabilities and then verify against relevant supporting documentation, such as payroll records for salaries payable or tax regulations for taxes payable.
Ensure the amounts are reasonable and well-supported.
It helps to review these calculations regularly so you can be sure which elements are required and that they’re accurately estimated.
Reconcile equity accounts
Transactions affecting equity include owner contributions or dividends.
Ensure all changes are properly documented with supporting documentation like stock certificates or board meeting minutes.
Check that these same figures are reflected accurately in the stockholder records.
5. Investigate discrepancies
When balances don’t match, find out why as soon as possible.
Trace every difference back to its origin.
It could be a data entry error or a missing transaction, or even fraudulent manipulation of the data.
6. Update your general ledger
Once you find errors, identify the source of truth (most likely the earliest document in the chain of events) and correct your general ledger accordingly.
Make journal entries to indicate where you have adjusted the balances, documenting all relevant details.
Appropriate details include the date, the accounts affected, the reason for the adjustment, and where to find the supporting documentation.
This creates a clear audit trail.
7. Review and approve
Finally, if possible, have a second person review and approve all reconciliations.
This added oversight greatly reduces the chance of unresolved discrepancies surviving the process.
Balance sheet reconciliation example
Let’s use the cash account as the scenario for a reconciliation example.
Imagine your bank statement shows a balance of $10,200 at the end of the month, but the cash account in your general ledger says $10,500.
You need work out why your internal system is up $300.
You scan through the cash ledger and find that a $300 deposit was indeed actioned and recorded.
Most likely, the bank hasn’t processed it yet.
This deposit is a reconciling item which you would note as a “deposit in transit” on your cash reconciliation. Your reconciled cash balance will now match.
Here’s what it looks like in a reconciliation document for this month:
| GL cash ledger | Bank statement | |
| Sales | $12,000 | $12,000 deposited |
| Salaries | $2,000 | $2,000 withdrawn |
| Sale on credit | $300 | – |
| Dividend | $200 | $200 deposited |
| Balance | $10,500 | $10,200 |
| Difference | $300 | |
| Reconciling item | Deposit in transit $300 | |
| Reconciled balance | $10,500 |
Challenges when reconciling balance sheet accounts
Being a complex operation involving many documents, there are several challenges that can arise during a balance sheet reconciliation.
Here are the most common ones.
High transaction volumes
These could catch you by surprise when your business grows or during seasonal peaks.
Reconciliation is time-consuming, but managing and matching numerous transactions greatly adds to the load.
Missing documentation
If invoices, receipts, or other supporting documents are lost or misplaced, it’s very difficult to verify the balances in your accounts.
You may need to contact the other party in affected transactions to obtain copies of the documentation.
Data entry errors
If you use a traditional filing system and paper records, human error is always a risk.
Mistakes made when entering financial data into your accounting system will show up during reconciliation.
However, they result in lost time that could have been avoided.
Data in disconnected silos
Compiling data from different sources is not only time-consuming but also presents the challenge of harmonizing data recorded in different formats.
Timing differences between records
All your transactions involve two parties, each with different workloads and processes.
This means that one party might record a transaction at a different time than the other.
For example, a payment you send might not clear the recipient’s bank until the next day.
Lack of proper procedures
Without clear guidelines and standardized internal controls, your reconciliation process can become inefficient, and inconsistencies may be overlooked.
Balance sheet reconciliation best practices
Concerned about those challenges?
Fear not—there’s a lot you can do to make your reconciliation go smoothly.
Try these basic tips:
Establish a regular reconciliation schedule
When transaction volume is high, perform cash account reconciliations on a daily or weekly basis.
This helps catch discrepancies quickly, preventing errors from snowballing through the rest of the accounting process.
Monthly reconciliation is typically sufficient for other balance sheet accounts.
Use a consistent reconciliation format
Having a standard template or method for your reconciliations makes the process easier to follow and review.
By following a standardized process, you and your staff will learn to spot deviations more easily, while also improving the general efficiency of the process.
This consistency ensures thoroughness and accuracy across all account reconciliations.
Keep clear and organized documentation
Maintaining well-organized supporting documents for all transactions is crucial for efficient reconciliation.
This makes it easier to trace and verify account balances, saving time when investigating discrepancies.
Segregate duties
If you have sufficient staff, take steps to divide the workload between different people.
By preventing one person from controlling everything in the financial process, you reduce the risk of errors and fraud.
Separating the responsibilities for recording transactions, reconciling accounts, and approving adjustments adds to your system of checks and balances.
Regularly review procedures and assess risk
Periodically reviewing your balance sheet reconciliation procedures and conducting a thorough risk assessment can significantly boost the efficiency and accuracy of this operation.
This lets you identify potential bottlenecks and unnecessary steps, while pinpointing accounts that are inherently higher risk.
With that information you can focus your reconciliation efforts where they are most needed and potentially identify discrepancies more quickly.
Regularly updating your processes based on these reviews ensures continuous improvement and more reliable financial statements.
Invest in accounting software to automate tasks
Specialized software with features like bank feeds and automated matching can significantly streamline the reconciliation process.
Going through balance sheets line by line is hugely time-consuming and drains your mental resources.
By using software to reduce manual effort, you don’t just speed up the process, you also minimize data entry errors.
These solutions often come with pre-configured workflows to simplify comparisons and identify discrepancies.
Cloud-based solutions have the advantage of real-time updates and built-in communication tools.
By facilitating collaboration this ensures that all stakeholders are on the same page.
Final thoughts
Regularly reconciling your balance sheet accounts is a proven way to maintain accurate financial records, particularly as your business grows and adds complexity.
However, reconciliation requires patience and diligence.
Consistent processes and the use of suitable tools can greatly simplify the task.
Accounting software takes the effort out of transaction matching, instantly flagging discrepancies as they arise.
Many systems offer built-in reconciliation tools, saving you time and enhancing the efficiency and accuracy of this crucial process.
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