How to Reconcile a Balance Sheet: A Process

A balance sheet provides a snapshot of a business’s financial position at a specific point in time, detailing its assets, liabilities, and equity. Balance sheet reconciliation is a systematic review performed to confirm these financial statements accurately reflect the company’s financial standing. It is a fundamental practice for any entity managing its finances.

Understanding Balance Sheet Reconciliation

Balance sheet reconciliation involves comparing general ledger account balances with independent supporting documents. Its purpose is to verify financial records, detect errors, and identify discrepancies.

A reconciled balance sheet signifies that all account balances are substantiated and reliable for financial reporting and decision-making. This process helps prevent financial misstatements and can even uncover fraud.

Every balance sheet account should undergo reconciliation. It forms a core part of the financial close process, providing confidence in account balances and surfacing errors before they have a wider impact.

Preparing for Reconciliation

Before initiating reconciliation, gather all necessary information and documents. The general ledger, or a trial balance, serves as the primary internal record of financial transactions, providing account balances for comparison against external or subsidiary records.

Supporting documents specific to each balance sheet account include:
Bank statements for cash accounts.
Customer ledgers and sales invoices for accounts receivable.
Vendor statements and purchase invoices for accounts payable.
Fixed asset registers for tangible assets.
Physical count records or inventory system reports for inventory.

Previous reconciliation reports are also valuable for context.

Performing the Reconciliation

Performing the reconciliation involves a systematic comparison of general ledger balances with supporting documentation for each balance sheet account. This process begins by selecting an account and comparing its general ledger balance to the corresponding external or subsidiary record. Matched items are ticked off, and any discrepancies are noted for investigation.

Cash Accounts

For cash accounts, reconciling bank statements to the cash ledger is a common task. This involves identifying outstanding checks, deposits in transit, bank errors, service charges, and interest earned for adjustment to align the internal cash balance with bank records.

Accounts Receivable

Accounts receivable reconciliation requires comparing the accounts receivable ledger to individual customer balances and sales invoices. This ensures the total amount customers owe according to internal records matches the sum of individual outstanding invoices.

Accounts Payable

Accounts payable reconciliation involves comparing the accounts payable ledger to vendor statements and purchase invoices, verifying amounts owed to suppliers.

Inventory

Inventory reconciliation involves comparing physical counts or detailed inventory system reports to the general ledger balance. Discrepancies can arise from shrinkage, damage, or data entry errors.

Fixed Assets

For fixed assets, the fixed asset register, which details each asset’s cost, accumulated depreciation, and net book value, is compared against the general ledger to confirm asset values and proper depreciation recording.

Resolving Variances

When discrepancies, or variances, are identified during the reconciliation process, understanding their root causes is the next step. Common reasons for these differences include timing differences, such as checks issued but not yet cashed, or deposits made but not yet reflected on the bank statement. Data entry errors, missing transactions, mathematical mistakes, or even fraudulent activities can also lead to variances.

Investigating these discrepancies requires a methodical approach. This may involve reviewing individual transaction details, checking for duplicate entries, and re-verifying calculations. For example, if an invoice amount differs, one might compare it against the original purchase order or delivery receipt. Reaching out to external parties like vendors or customers might be necessary to clarify unmatched items or incorrect amounts.

Once the cause of a variance is pinpointed, the necessary accounting adjustments must be made. This typically involves recording journal entries to correct the general ledger balances. For instance, a journal entry would be created to record bank service charges or interest earned that appeared on the bank statement but not yet in the company’s books. Correcting entries are also used for data entry errors or misclassifications to ensure accurate financial reporting.

Finalizing the Reconciliation

Upon completing reconciliation and resolving all identified variances, proper documentation is essential. This involves saving reconciled statements, listing all adjustments made, and providing clear explanations for any remaining variances. Comprehensive documentation creates an audit trail and supports the accuracy of financial records.

A review process is often implemented, where a supervisor or another team member reviews and approves the reconciliation. This independent review helps ensure the accuracy and completeness of the reconciliation and strengthens internal controls. The review confirms that all steps have been followed and that the financial position is accurately represented.

Necessary journal entries, derived from the reconciliation findings, are then posted to the general ledger. These entries ensure that the balance sheet accurately reflects the company’s financial position after all corrections and adjustments. Reconciliations are typically performed monthly, especially for high-volume accounts, to maintain continuous accuracy and facilitate timely financial reporting.