How to Do a Balance Sheet Reconciliation

Balance sheet reconciliation is the process of comparing a business’s internal accounting records with external documentation to confirm the accuracy of its financial position. This comparison ensures that the balances reported for assets, liabilities, and equity are correct and reliable. Regular reconciliation helps businesses identify and address discrepancies, supporting sound financial health and informed decision-making. It is a routine procedure performed during the financial close cycle, often monthly, quarterly, or annually, to verify that financial statements accurately reflect the company’s true condition.

Accounts Requiring Reconciliation

Various balance sheet accounts require reconciliation. Cash and cash equivalents are routinely reconciled to align internal cash ledgers with bank statements. This confirms accurate recording of transactions and helps detect unrecorded items, bank errors, or fraud.

Accounts receivable require reconciliation to verify outstanding customer balances match customer statements and sales invoices, confirming proper billing and payment application. Accounts payable reconciliation ensures amounts owed to vendors are consistent with supplier statements and purchase orders, confirming accurate recording of purchases and payments.

Inventory accounts require reconciliation to match recorded quantity and value of goods with physical counts, identifying discrepancies from theft, damage, or recording errors. Fixed assets, such as property, plant, and equipment, are reconciled against a fixed asset register to verify their existence, depreciation, and book value, ensuring correct valuation on the balance sheet.

Accrued liabilities (expenses incurred but not yet paid) need reconciliation to confirm all obligations are recorded, including accrued wages, interest payable, or utility expenses. Prepaid expenses (payments for future goods or services) are reconciled against contracts or payment schedules to ensure the correct portion is expensed. This ensures the balance sheet presents a complete and accurate financial picture.

Gathering Necessary Information

Gathering specific internal and external documents is foundational for reconciliation. For cash and bank accounts, the general ledger cash account, detailing inflows and outflows, is compared with external bank statements, recording all bank transactions, including deposits, withdrawals, and bank charges. Internal records like check registers and deposit slips are also useful.

For accounts receivable, the general ledger balance is supported by an aging report listing outstanding customer invoices, categorized by overdue time, alongside customer statements and sales invoices. For accounts payable, the general ledger balance is cross-referenced with vendor statements summarizing supplier transactions. Purchase orders and vendor invoices confirm outstanding obligations.

Inventory reconciliation requires the general ledger inventory account balance, supported by detailed inventory records tracking quantities and costs. Physical inventory count sheets verify actual stock. For fixed assets, the general ledger account is reconciled using a fixed asset register detailing each asset’s acquisition cost, depreciation, and accumulated depreciation. Purchase invoices and depreciation schedules are also needed.

Accrued liabilities require the general ledger account, supported by contracts, expense reports, or payroll records detailing accrued expenses. Prepaid expenses are reconciled using the general ledger account, alongside contracts or amortization schedules outlining the initial payment and expense recognition period.

Performing the Reconciliation Steps

The reconciliation process begins by comparing each account’s internal general ledger balance to its corresponding external statement or supporting documentation. For instance, the cash balance is compared to the bank statement’s ending balance, showing if records align.

After comparing balances, the next step identifies specific discrepancies between internal and external records. Any transaction present in one record but not the other, or with differing amounts, dates, or descriptions, is flagged as a reconciling item.

Discrepancies arise from various sources, including timing differences like uncashed checks (issued but not cleared) or deposits in transit (recorded but not credited).

Other discrepancies stem from bank errors (incorrect charges, duplicate entries) or data entry errors, such as transposed numbers (e.g., $58 recorded as $85), omissions, or errors of commission (e.g., wrong account posting, duplicate entry).

Once discrepancies are identified, necessary adjustments are recorded through journal entries in internal records. For bank reconciliation, this might include recording bank service fees or NSF checks. Timing differences like outstanding checks or deposits in transit typically do not require journal entries, as they are expected to clear.

For other accounts, correcting journal entries adjust mistaken amounts. Each adjustment must be documented, including the discrepancy’s nature, investigation steps, and the specific journal entry. This documentation provides an audit trail and ensures transparency. After adjustments, the internal general ledger balance should match the reconciled external balance.