Balance sheet reconciliation is a process that compares the closing balance of a business’s assets with its liabilities. It is a crucial accounting and auditing practice that ensures the values presented in a balance sheet are accurate, complete and representative of reality.
Reconciliations are essential for internal controls to protect against errors, fraud and misrepresentation. They can also help detect missing, duplicated or untimely transactions.
Gather Documentation
Balance sheet reconciliation is a crucial process for a business, from a regulatory and compliance perspective as well as a functional one. It involves reviewing and comparing information on the company’s balance sheet with documentation, including invoices and bank statements. It helps to verify transactions and avoid errors that can result in fraudulent behavior or inaccurate financial reports.
The most important step in the balance sheet reconciliation process is gathering all of the necessary documentation to ensure that the ending balances on the business’s balance sheet are accurate. This includes everything from customer invoices and bank statements to payment terms, product or service prepayments and more.
Gathering documentation for a balance sheet reconciliation can be tedious and time-consuming, but it’s essential for the process to be as efficient as possible. The right balance of manual and automated tasks can expedite the process, improve accuracy, require less reliance on key staff and save money.
Before starting the process, you’ll want to determine which accounts will need to be reconciled. This can be done based on materiality, number of transactions, complexity and history of errors.
Next, you’ll want to assign the balance sheet accounts to a person who will be responsible for completing the reconciliation. This person should be given appropriate training and access to the relevant records.
Review Journal Entries
Balance sheet reconciliation is an essential and integral process that every company must perform on a regular basis. It is the key to ensuring that financial statements accurately represent an organization’s true condition and provide confidence to investors.
It is also a vital safeguard against fraud as it ensures that general journal entries are accurate and well-established accounting rules are followed. This includes ensuring that transactions are recorded in the proper accounts, with debits and credits agreeing to zero.
Accounts that are not properly classified will skew the balance of a general ledger (GL) account. Examples of this include invoices that are credited to the wrong expense account or purchases that are recorded as cash rather than office supplies. These are a few of the issues that a finance team must be on the lookout for as they work through a balance sheet reconciliation.
Also read: The Importance of a Personal Balance Sheet
Step one of the balance sheet reconciliation involves reviewing journal entries. This is an important part of the overall process as it requires the reviewer to check the dates of business transactions, identify any discrepancies, and ensure that all of the journal accounts are matched to the correct business transaction accounts in the general ledger.
Another crucial step of the balance sheet reconciliation is to make sure that all of the journal accounts have been posted correctly, including matching the posting date to an accounting period. This is particularly important if a journal entry was entered near the beginning or end of an accounting period.
Compare Documentation to Ending Balances
For the real deal, there’s no substitute for a physical audit of your books and records. This is especially true if you’ve recently moved your operations from one location to another and rolled forward your balance sheet and cash accounts. A hiccup here or there could lead to financial loss down the road. To avoid this costly repercussion, take a look at your bookkeeping and accounting records and compare them against your general ledger data.
You’ll be surprised how often you’ll find that the two balances are not exactly the same. In the long run, you’ll be a more accurate and informed business owner. For example, you might discover that you’ve paid too much tax in one tax year. This may not be the end of the world, but it’s definitely something you want to avoid. To keep things running smoothly, consider bringing in a competent CPA for this task.
Adjust Journal Entries
A balance sheet reconciliation is a critical process for ensuring the accuracy of financial statements. It can also help identify potential fraud or other issues before they become serious problems.
The first step in a balance sheet reconciliation is to gather and review journal entries. These entries are the raw data that will be used to derive the closing balances for the accounts on the balance sheet. Reconciliations are typically completed by more than one person, so the accuracy of the information is important.
Once the journal entries are reviewed, they are compared to the ending balances in the general ledger to see if the documents match. If they don’t, the next step is to investigate why the beginning balances don’t match the ending balances.
It is possible that the starting and ending balances are inaccurate because of miscoding, timing differences or other errors. If this is the case, adjusting journal entries may be necessary.
For example, if a business has an invoice for a credit card, it might debit the cash account and credit the accounts payable account. This would result in a correct balance of the cash account on the income statement, but the wrong balance on the balance sheet. This is a common mistake that needs to be corrected before releasing the financial statements.
The accounting department then makes adjusting journal entries to fix the problem, which includes recording a debit to the accounts receivable account and a credit to the long-term debt account for the amount of the credit card bill. This is a simple process that can be done quickly and easily.