Accounting
Oct 16, 2023 Michael Whitmire
Total assets = Total liabilities + Total equity. It’s the fundamental accounting equation.
But how do you check that your assets, liabilities, and equity are correct? The answer is with balance sheet reconciliations.
Balance sheet reconciliations, a vitally important part of a company’s financial reporting process, is where a company compares its financial records to the numbers on its balance sheet to make sure they match. It involves checking the accuracy of assets, liabilities, and shareholders’ equity by comparing transaction records and supporting documents. This process helps in identifying errors, discrepancies, or omissions in the financial statements, which can be crucial for ensuring financial accuracy and regulatory compliance. They are done at regular intervals and are a part of routine accounting procedures.
Balance Sheet Reconciliations
When accountants “close the books,” they complete reconciliations of the balance sheet accounts.
Closing the books is an accounting term used at the end of a month, quarter, or year. It’s sometimes called month-end close or monthly close, and it’s when accountants verify that the numbers on the financial statements are correct.
During the closing process, the reconciliation process typically starts with the balance sheet. Accountants will reconcile:
- Cash
- Accounts receivable
- Accounts payable
- Credit cards
- Fixed assets
- Prepaid expenses
- Deferred revenue
- Debt
- Equity
A reconciliation compares the balances in the general ledger with other supporting documentation to verify the accuracy of the general ledger balance.
Supporting documentation can include bank statements, subsidiary ledgers, and payment schedules.
If the general ledger balance doesn’t match the supporting documentation, that’s ok and common. These differences are called reconciling items, and you’ll need to understand what they are.
Sometimes reconciling items occur from timing differences. Like when a check you’ve written hasn’t cleared the bank.
Other times, reconciling items occur from errors. Maybe you forgot to record a few journal entries or mistyped a number, just like I have in the past. Discovering these bookkeeping errors takes a lot of time and energy. Automation of the reconciliation process with FloQast can reduce errors and improve workflow.
How To Do a Balance Sheet Account Reconciliation
When reconciling your bank accounts, your accounting software likely has a bank reconciliation module built-in. For all other balance sheet accounts, you’ll likely have to create your own reconciliation.
Reconciling Cash Accounts
➽Step 1: Print or download the general ledger for the cash account you’re reconciling.
➽Step 2: Print or download bank statements for the account you’re reconciling.
➽Step 3: Compare transactions from the general ledger to the bank statement.
➽Step 4: Make a note of all differences between the general ledger and the bank statement.
➽Step 5: Investigate the differences.
➽Step 6: Make corrections to the general ledger account, if necessary.
Reconciling other balance sheet accounts
When reconciling other balance sheet accounts, you’ll generally follow the same steps, but your supporting documents will be different.
| Account reconciliation supporting document examples | |
| Balance sheet account | Supporting document |
| Accounts receivable | Subsidiary ledgerClient invoices |
| Prepaid expenses | Subsidiary ledgerVendor invoices |
| Accounts payable | Subsidiary ledgerVendor invoices |
| Credit cards | Credit card statements |
| Fixed assets | Subsidiary ledgerVendor invoices |
| Deferred revenue | Client invoicesClient contracts |
| Debt | Promissory notePayment schedule |
The Importance of Balance Sheet Reconciliations
Accurate financial reporting relies on an accounting process with solid internal controls. And one of the most important internal controls is the balance sheet reconciliation process. Without it, business owners lack confidence in their financial statements.
Reconciliations are necessary to avoid inaccurate information. Balance sheet reconciliations help you:
- Catch errors
- Identify weaknesses in internal controls
- Detect fraud
- Manage cash flow
Armed with a reconciled balance sheet, you’ll be more confident in making business decisions.
Examples of Balance Sheet Reconciliations
Here’s a quick look at what a simple bank reconciliation may look like:
You’ll notice the top of this reconciliation starts with the bank statement’s ending balance and then adds and subtracts entries you have on your general ledger that the bank hasn’t seen.
And the bottom half of the reconciliation starts with the balance of the general ledger and then adds and subtracts entries that appear on the bank statement that you haven’t seen.
In the end, the final adjusted cash balances should match. In our example, we’ll need to record journal entries with a debit of $2 for the interest revenue and a credit of $13 for the monthly service fee.
If you were reconciling fixed assets, a simple reconciliation might look like this:
In this example, the details on the fixed assets would be supported by invoices from when you purchased the assets. And the accumulated depreciation amount would come from your depreciation schedule.
Balance Sheet Reconciliation Template
Start with your trial balance as the launch point for your balance sheet reconciliation process. With all your accounts summarized into a column layout, you can go down the list, ensuring you have a reconciliation for each balance sheet account.
A simplified example might look like this:
The column on the far right represents where you completed the reconciliation. For cash, the bank reconciliation is located on a reconciliation labeled A-1.
Income statement accounts usually aren’t reconciled. That’s because balance sheet accounts are an accumulation of transactions from day one at your business. In comparison, income statement accounts are zeroed out at the start of each year.
Just because you’ve been doing balance sheet reconciliations manually since the beginning of time doesn’t mean you’re stuck with it. With reconciliation software, you can put the spreadsheets, pencils, and papers away.
Automating your reconciliations will:
- Save time
- Lower costs
- Reduce risk
- Increase compliance
Learn how FloQast’s AutoRec can help automate the tedious process of month-end close.
Learn what industry experts from Ventana Research have to say about the month-end close moving forward
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