Pia Mikhael is a guest contributor. The views expressed are hers and do not necessarily reflect the views of Rho.

What is balance sheet reconciliation?

Balance sheet reconciliation is a crucial accounting process where you compare and verify the accuracy of your company's financial records. You match the balances in your general ledger accounts with supporting documentation, bank statements, and other independent sources. 

What gets reconciled?

You reconcile all accounts listed on your balance sheet, including:

Assets

Under this, we have multiple sub-sections such as:

• Cash accounts and bank accounts
• Accounts receivable
• Prepaid expenses 
• Fixed assets
• Inventory

Liabilities

Under this, we have multiple sub-sections such as:

• Accounts payable and loans
• Equity accounts
• Accrued liability 

Each line item on the balance sheet should be scrutinized and verified by your accounting or finance teams. You also need to pay special attention to high-risk or high-value accounts, as well as those with frequent transactions. Plus, don't overlook seemingly minor accounts or those with zero balances, as these can sometimes hide errors or misclassifications.

Why reconcile the balance sheet?

Reconciling your balance sheet is essential for maintaining accurate financial records and ensuring the integrity of your financial reporting. By performing regular reconciliations, you can detect errors, identify discrepancies (if any), and prevent fraud.

This can help you comply with accounting standards and regulatory requirements. It also provides you with reliable financial information and valuable insights for decision-making.

Regular reconciliations build confidence in your financial data, which is crucial for stakeholders, auditors, and potential investors.

Where does balance sheet reconciliation fit into the financial close process?

Balance sheet reconciliation plays a key role in the financial close process. It typically occurs near the end of the cycle, after all transactions have been recorded and before financial statements are finalized. Here's how it fits in:

1. Transaction recording: You record all financial transactions for the accounting period.
2. Trial balance preparation: You generate a trial balance to ensure debits and credits match.
3. Adjusting entries: You make any necessary adjusting entries.
4. Balance sheet reconciliation: You reconcile each balance sheet account to ensure accuracy.
5. Financial statement preparation: You create financial statements based on the reconciled accounts.
6. Review and approval: Management reviews and approves the statements.
7. Reporting and filing: You distribute reports and file required documents.

Balance sheet reconciliation acts as a final check before you produce financial statements, and ensures your financial data is accurate and complete.

Why is balance sheet reconciliation necessary?

Balance sheet reconciliation is necessary to maintain the accuracy and reliability of your financial records. You'll be able to detect and correct errors, whether they're from manual data entry mistakes or system glitches. Also, it might aid in identifying unusual transactions or patterns that could indicate fraud.

By reconciling regularly, you ensure compliance with accounting standards and regulatory requirements. It provides you with confidence in your financial data, which is crucial for making informed business decisions and presenting accurate information to stakeholders.

Ledger balance meaning

The ledger balance refers to the final balance of an account as recorded in your general ledger at a specific point in time. It represents the sum of all transactions posted to that account up to that particular date. Your ledger balance is the official record of an account's value in your accounting system.

However, it's important to note that the ledger balance may not always reflect the most current or accurate figure. This is why reconciliation is necessary – to verify that your ledger balance matches other reliable sources of information, such as bank statements or subsidiary ledgers, and to make any required adjustments.

6 steps to reconcile the balance sheet

A no-mistake balance sheet reconciliation process is important for maintaining accurate financial records. But where do you start? Let's break down this complex task into six manageable steps.

1. Identify the accounts to be reconciled

Start by determining which accounts need reconciliation. 

All accounts may not require your attention, as some might be handled by other departments. So, focus on the accounts that fall under your responsibility to avoid duplicating efforts and wasting time. This targeted approach ensures you're using your resources efficiently.

2. Gather the necessary account information

Collect all necessary documentation for the period you're reconciling. This includes:

• Bank statements
• Receipts
• General ledger exports
• Accrual or depreciation schedules
• Any other relevant financial documents

In case your data is scattered across various Excel files, consider using modern accounting software to centralize this information and make future reconciliations easier.

3. Compare the information

Now it's time to put your detective hat on and start comparing your balance sheet line items and journal entries with the supporting documentation. 

Carefully review each journal entry, ensuring:

• Correct accounts are used
• All values match your documentation
• Transactions are recorded in the proper period

Bonus tip: Export your current accounting system data and save a copy for reference – this will be a savior if you need to backtrack.

4. Investigate any differences

Found a discrepancy? Don't panic. Sometimes it's a simple typo, but other times you might need to dig deeper. So, be prepared to look into multiple systems if necessary.

Your goal is to understand the root cause of each discrepancy, no matter how small. This attention to detail helps maintain the integrity of your financial records.

5. Make adjustments to the general ledger

Once you've identified discrepancies, it's time to correct them. Create adjusting journal entries to:

• Reclassify misplaced transactions
• Add missing entries
• Correct erroneous values

Maintain version control as you make these changes, tracking the impact of each adjustment on your balance sheet. This helps you understand the full effect of your reconciliation efforts.

6. Complete the balance sheet reconciliation and document

In this final step, document your entire reconciliation process. Include details about:

• Investigations conducted
• Discrepancies found
• Adjustments made
• Reasoning behind each decision

A thorough documentation is invaluable for auditors and will help speed up future reconciliations. Make note of any recurring issues you've noticed, as addressing these proactively can save time and reduce errors in the future.

Balance sheet reconciliation checklist

While the steps mentioned above are very comprehensive, it's important to ensure accuracy and completeness before finalizing your balance sheet reconciliation. So, use this checklist to double-check your work and catch any potential issues.

By asking yourself these questions, you might be able to improve the quality of your reconciliations and reduce the risk of errors:

• Have you reconciled all balance sheet accounts, including those with zero balances?
• Do the ending balances on your reconciliation match the general ledger and financial statements?
• Have you obtained and reviewed all necessary supporting documentation for reconciling items?
• Are there any unusual or unexpected variances that require further investigation?
• Are all adjusting entries properly recorded and approved?
• Have you checked for any unrecorded transactions or liabilities that should be included?
• Is your reconciliation mathematically accurate, with no formula errors in spreadsheets?
• Have you reviewed the reconciliation for any potential signs of fraud or irregularities?

Challenges of reconciling the balance sheet

While the balance sheet reconciliation process helps in maintaining accurate financial records; it doesn't come without its hurdles. Let's explore four common obstacles you might face and how they can impact your reconciliation efforts.

1. Disconnected data makes it difficult to ensure you're working with the right numbers

When your financial data is scattered across multiple systems or spreadsheets, it becomes difficult to ensure you're working with the most up-to-date and accurate information. You might find yourself questioning which version of a report is correct or spending valuable time searching for the right numbers. This disconnection can lead to errors and inconsistencies in your reconciliations, potentially compromising the integrity of your financial statements.

2. Lack of internal controls or rigid processes leads to inaccuracies and delays

Without robust internal controls or well-defined processes, your reconciliation efforts can quickly go off track. You might find discrepancies slipping through the cracks or approvals happening without proper review. How can you be confident in your financial reports if you're unsure about the reliability of your reconciliation process? Weak controls not only lead to inaccuracies but can also cause delays as you scramble to verify information at the last minute.

3. Manual processes take too long and are opportunities for mistakes

Reconciling your balance sheet manually is not only tedious but also opens the door to human error. You might spend hours matching transactions, only to realize you've missed a crucial detail. Also, manual processes can drain your team's time and energy, leaving less room for strategic financial analysis. 

4. Inadequate documentation might lead to unnecessary confusion

Proper documentation is important for accurate reconciliations and smooth audits. However, many organizations struggle with maintaining clear, comprehensive records of their reconciliation process. You might find yourself scrambling to explain discrepancies or justify adjustments without proper supporting documents. This lack of documentation can lead to confusion, delays in the reconciliation process, and potential issues during audits.

Best practices for reconciling the balance sheet

Apart from the steps mentioned above, following a few best practices may help streamline your reconciliation process, reduce errors, and maintain accurate, up-to-date financial records. Some of these practices include:

1. Automate what you can

Use software tools to automatically match transactions, calculate balances, and flag discrepancies. Some areas that you can automate are:

• Transaction matching: Use software to automatically pair transactions across different systems.
• Balance calculations: Let technology handle the math to reduce calculation errors.
• Data import: Automate the process of pulling data from various sources into your reconciliation tool.
• Recurring journal entries: Set up automatic entries for regular, predictable transactions.

By automating these routine tasks, you free up your team to focus on analyzing results and addressing complex issues.

2. Establish and adhere to processes

Create clear, documented procedures for your reconciliation process. Here's how to do it:

1. Document your procedures: Write clear, step-by-step instructions for each type of reconciliation
2. Assign roles and responsibilities: Clearly define who prepares, reviews, and approves each reconciliation
3. Set deadlines: Establish a timeline for when each reconciliation should be completed
4. Implement a review process: Ensure all reconciliations are checked by a second pair of eyes
5. Create a standardized template: Use a consistent format for all reconciliations to improve efficiency

Sticking to these processes ensures nothing falls through the cracks. Also, when everyone knows their responsibilities and deadlines, you'll minimize confusion and reduce the risk of overlooked items.

3. Validate with underlying systems of record, like an ERP

By validating against your systems of record, you catch discrepancies early and maintain the integrity of your financial statements. It also ensures that your reconciled balances align with your core financial data. Here's how to do it effectively:

1. Compare balances: Ensure your reconciled figures match those in your ERP or accounting system.
2. Investigate discrepancies: Any differences between systems should be thoroughly examined and explained.
3. Document your findings: Keep clear records of any variances and their resolutions.
4. Perform regular system checks: Ensure your ERP data is accurate and up-to-date.

4. Use software to help reconcile the balance sheet

The right software can dramatically reduce reconciliation time while improving accuracy. So, when investing in a specialized reconciliation software, look for features such as:

• Automated matching: Software that can pair transactions across multiple systems.
• Variance analysis: Tools that highlight and help explain differences.
• Audit trails: Features that track all changes and approvals for better accountability.
• Customizable workflows: The ability to tailor the software to your specific reconciliation process.
• Reporting capabilities: Easy-to-generate reports for management review and audit purposes.

Balance sheet reconciliation example

That was all the theoretical concepts about balance sheet reconciliation. However, to understand how to reconcile a balance sheet, you need to look at some practical examples. So, here is what one looks like: 

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How to do this?

To help you understand better, here is a step-by-step process:

1. Determine the cash balance as per the bank statement: Start with the cash balance reported by the bank at the end of the period, which is $25,000 as of June 30, 2024.
2. Add deposits in transit: Include any deposits that the company has recorded but the bank has not yet acknowledged. Here, deposits in transit amount to $4,000, bringing the adjusted bank balance to $29,000.
3. Deduct outstanding checks: Subtract checks that have been issued by the company but not yet cleared by the bank. Outstanding checks total $2,000, reducing the adjusted bank balance to $27,000.
4. Note the cash balance per book: Record the cash balance from the company's internal records at the end of the period, which is $27,000.
5. Add interest earned: Add any interest earned that the bank has recorded but the company has not yet included in its books. Interest earned is $100, increasing the adjusted book balance to $27,100.
6. Deduct monthly service fee: Subtract any service fees charged by the bank that have not been recorded by the company. The service fee is $100, bringing the adjusted book balance to $27,000.
7. Compare adjusted balances: The final step is to ensure that the adjusted bank balance and the adjusted book balance match. Both adjusted balances are $27,000, indicating successful reconciliation.

What are the costs of manual balance sheet reconciliation?

Manual balance sheet reconciliation can hold your company back. By sticking to outdated methods, you're missing out on opportunities to improve your financial processes and drive business growth. Here are the key costs you face when relying on manual reconciliations:

Finances

While the exact costs vary by company, manual reconciliations are undoubtedly expensive. You're paying skilled professionals to perform repetitive tasks that could be automated. By modernizing your processes, you can redirect these funds to more impactful areas like business analytics or expanding your financial team's capabilities.

Compliance and audit

Meeting regulatory requirements and handling auditor requests become more complex with manual processes. You may struggle to maintain proper documentation and demonstrate adherence to internal controls. This lack of transparency can lead to compliance issues and make audits more time-consuming and costly. Instead, clear audit trails are crucial for maintaining trust with stakeholders and regulators.

Time

You waste countless hours on tedious data entry, spreadsheet manipulation, and error checking. This time could be better spent on strategic financial planning and analysis to guide your company's future.

Risk

Manual reconciliations are prone to human error, potentially compromising the accuracy of your financial statements. This heightened risk of mistakes or oversights can lead to misreported figures, compliance issues, or even leave you vulnerable to fraud. Inaccurate financial data can result in poor business decisions and damage your company's reputation.

Talent

Skilled accountants often find manual reconciliations tedious and unfulfilling. This can lead to decreased job satisfaction, lower productivity, and higher turnover rates. Whereas, automating your processes can help retain top talent by allowing them to focus on more stimulating and impactful tasks.

Balance sheet reconciliation template

When creating a balance sheet reconciliation, use your trial balance as the starting point. Then, arrange all your accounts in a column format and systematically review each one, confirming you have a reconciliation for every balance sheet account.

Here's a template from our guide on how to prepare a balance sheet that you can use to simplify the process:

FAQs about balance sheet reconciliation

How often should you reconcile balance sheet accounts?

Balance sheet accounts should typically be reconciled monthly to ensure accuracy and timely detection of errors. This helps maintain up-to-date financial records and supports the integrity of financial statements.

Why reconcile balance sheet accounts?

Reconciling balance sheet accounts ensures that the recorded balances are accurate and complete, which is essential for accurate financial reporting. It helps identify and correct discrepancies, preventing financial misstatements.

How do you balance an unbalanced balance sheet?

To balance an unbalanced balance sheet, review and verify all entries for accuracy and completeness, correcting any errors found. Also, ensure that total assets equal the sum of liabilities and equity.

How do you know if your balance sheet is correct or if it needs to be reconciled?

You can tell if your balance sheet is correct by verifying that total assets equal the sum of liabilities and equity and checking for any unusual or unexplained balances. If discrepancies or unusual balances are found, the balance sheet needs to be reconciled.

What is the role of balance sheet reconciliation in the financial close process?

Balance sheet reconciliation is crucial in the financial close process as it ensures the accuracy and completeness of financial statements. It involves verifying that account balances are correct, which is essential for reliable financial reporting.

What is the difference between bank reconciliation and balance sheet?

Bank reconciliation involves comparing a company's bank statement with its internal records to ensure consistency, while balance sheet reconciliation involves verifying that all balance sheet accounts are accurate and complete. Both processes aim to identify and correct discrepancies but focus on different areas of financial records.

What are the 5 balance sheet assertions?

The five balance sheet assertions are:

• Existence
• Completeness
• Rights and obligations
• Valuation
• Presentation and disclosure

These assertions ensure that all reported assets, liabilities, and equity items are accurate, complete, and properly valued and disclosed in the financial statements.

Conclusion: Rho can help you maximize time for strategy

Regular balance sheet reconciliation helps in maintaining the financial accuracy and integrity of your organization. By diligently comparing and aligning your financial records, you can promptly detect discrepancies, prevent fraud, and ensure all transactions are properly accounted for. This process not only enhances the reliability of your financial data but also contributes to improved business efficiency and profitability in the long run.

Want to know how Rho can help you simplify your balance sheet reconciliation process and save you hours of effort? Get in touch to learn more today! 

Rho is a fintech company, not a bank. Checking and card services provided by Webster Bank, N.A., member FDIC; savings account services provided by American Deposit Management Co. and its partner banks.

Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.

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