How to Do Balance Sheet Reconciliation

Balance sheet reconciliation is a fundamental accounting process that verifies general ledger account balances against supporting documentation and external records. This ensures accuracy, maintains financial integrity, detects errors, prevents fraud, and provides a reliable basis for financial statements used for informed decision-making and reporting. Regularly performing this reconciliation is important for any business.

Understanding Balance Sheet Reconciliation

Balance sheet reconciliation serves to verify that the general ledger account balances align with corresponding supporting documentation and external sources. This process is important for maintaining data integrity, detecting errors, and preventing potential fraud. It also ensures that financial statements accurately reflect the company’s financial position, which is essential for informed decision-making by management, investors, and lenders.

Various balance sheet accounts undergo reconciliation:

• Cash and cash equivalents are reconciled with bank statements.
• Accounts receivable balances are compared with aging reports and customer invoices.
• Accounts payable are reconciled against vendor invoices, statements, and aging reports.
• Fixed assets, such as property, plant, and equipment, are reconciled with fixed asset registers, purchase invoices, and depreciation schedules.
• Liabilities like loans and accrued expenses are checked against loan statements or detailed schedules.

Gathering Information for Reconciliation

Effective balance sheet reconciliation begins with collecting all necessary internal and external documents and data for the specific period being reconciled. For cash accounts, this includes obtaining general ledger cash account reports, bank statements, canceled checks, and deposit slips.

For accounts receivable, relevant documents include the general ledger accounts receivable report, an aging report detailing outstanding customer balances, customer invoices, and payment records. Accounts payable reconciliation requires the general ledger accounts payable report, an aging report, vendor invoices, and payment records.

Fixed asset reconciliation necessitates the general ledger fixed asset account report, a detailed fixed asset register or schedule, and purchase invoices for assets. For loans and other liabilities, the general ledger loan account report and loan statements from lenders are required. Gathering these specific documents sets the foundation for a thorough and accurate reconciliation process.

Performing the Reconciliation Steps

Once all necessary information is gathered, the reconciliation process involves a methodical comparison of internal records with external documentation. Begin by obtaining the relevant general ledger account balance from the accounting software for the specific reconciliation period. Concurrently, gather the corresponding external or sub-ledger documents, such as a bank statement or an accounts receivable aging report, covering the same period.

The next step involves comparing the general ledger balance to the supporting document balance. Systematically list all items that cause the two balances to differ, which are known as reconciling items. Common examples of these items for cash accounts include outstanding checks that have been issued but not yet cleared by the bank, or deposits in transit that have been recorded by the company but not yet by the bank. For accounts receivable, unapplied payments or invoices recorded in one system but not another are typical discrepancies.

Investigating and Resolving Discrepancies

After identifying initial differences, the next phase involves investigating the root cause of each discrepancy. This investigation often requires reviewing individual transaction details, checking for data entry errors, missing transactions, or duplicate entries. Timing differences, where a transaction is recorded by one party in one period and by another in a subsequent period, are also common causes of discrepancies.

Once the cause of a discrepancy is determined, the next step is to ascertain if an adjustment is needed and how it impacts the accounting equation. Adjusting journal entries are then created and posted to the general ledger to correct errors or to record legitimate reconciling items that were not previously captured. For instance, bank service charges or interest earned might appear on a bank statement but not yet in the company’s books, necessitating an adjusting entry. These entries ensure the general ledger balance accurately reflects the financial reality.

Finalizing and Documenting Reconciliations

The concluding phase of the reconciliation process involves preparing a formal reconciliation statement. This statement summarizes the general ledger balance, lists all identified reconciling items, and ultimately arrives at a reconciled balance that matches the external record.

It is important to have the completed reconciliation reviewed by a second party or a supervisor. This review ensures accuracy and completeness, providing an additional layer of internal control. Finally, all supporting documents, the reconciliation statement itself, and any adjusting entries must be retained. These records serve as an audit trail for future reference and compliance, and are typically kept for a period of at least seven years, aligning with common tax and legal retention guidelines. Most companies perform these reconciliations monthly, often coinciding with the month-end close process.