Balance Sheet Reconciliation

Balance sheet reconciliation is one of several accounting functions that are performed whenever a business goes through its financial close.

The financial close is an all-encompassing process that occurs at the end of any accounting cycle – monthly, quarterly, or annually – and involves the final review, reconciliation, and analysis of all the various financial and accounting processes that occur during that cycle.

The balance sheet is a static document that summarizes the overall financial status of a business for a specific point in time.

Balance sheet reconciliation is the act of reviewing and verifying the accuracy of all the information that is contained within that document.

Because the information it contains reflects the financial status for a specific point in time, the balance sheet provides a picture or snapshot of the business and its key financial indicators. It does not reveal trends or history.

Information in the balance sheet is organized according to the three fundamental accounting measures:

• Assets—any resource of monetary value that the business owns

• Liabilities—any amount that the business owes to another party

• Equity—the financial stake in the business that its owners are entitled to after all liabilities are accounted for

All information in the balance sheet is arranged according to these three categories. Within each, various general ledger accounts will be listed. Ending balances for the reporting period will be recorded for each of these accounts.

For example, assets will include ending balances for such accounts as cash, accounts receivable, inventory, property, and others.

Liabilities will include accounts payable, deferred revenue, and debt. Finally, equity will include stocks, retained earnings, and accumulated income.

Balance sheet reconciliation verifies the accuracy of all the account information in the balance sheet by comparing these numbers with other forms of documentation to identify and address any discrepancies.

Accountants must verify all transactions in the various accounts that appear on the balance sheet.

They may also have to reconcile transactions that are recorded in subledgers with those that are recorded in the general ledger.

1. The first step is to identify the accounts that will be reconciled. All general ledger accounts that are listed in the balance sheet should be reconciled.

2. Next, it is important to identify and gather all necessary supporting documentation. This may include vendor invoices, customer invoices and payment records, bank and credit card statements, and any other documentation to support the transactions that are listed. Supporting documents will be used to help review, compare, and match the balances that are listed. The review process will help identify discrepancies. Accountants must also determine the root cause of any discrepancies.

3. Finally, discrepancies must be resolved by recording adjusting journal entries, and the entire reconciliation process must be documented for future audits.

Balance sheet reconciliation involves a number of challenges.

• Unreliable data can make for an ineffective balance sheet reconciliation process. When data is not stored in a centralized location with uniform entry formats, this can lead to inconsistencies and unreliability in the process, making it difficult to pinpoint and reconcile discrepancies.

• An overreliance on manual processes or poor technology can lead to inaccuracy and unreliable data that can similarly make it difficult to reconcile discrepancies. Antiquated systems can also drain manpower and time, creating unnecessary delays and raising the incidence of errors.

• Internal controls need to be set up. These are a set of policies and procedures that a company establishes and implements to ensure that its accounting procedures and financial reporting are accurate and ethical. A lack of well-developed and executed internal controls can undermine the accuracy and reliability of accounting reports and functions, including balance sheet reconciliation.

Businesses can take a number of steps to support an effective balance sheet reconciliation process.

Having reliable data, and in particular, a centralized database storage system with consistent formatting, will increase the reliability and accuracy of balance sheet reconciliation.

Thorough and detailed balance sheets, including the recording of all assets, liabilities, and equity, will ensure that the company's financial information is detailed and comprehensive, making the balance sheet reconciliation process more productive.

Similarly, regular reviews of the balance sheet will help identify discrepancies and errors.