Reconciliations are used throughout the practice of accounting for various reasons. One such example is the balance sheet reconciliation and it is an important component to performing regular closings in the accounting cycle.
In a healthy accounting environment, regular reconciliations are used to verify accurate information is in the accounting system. Reconciliations are one of many controls that should be used to ensure accuracy and detect fraud.
In this FAQ we will explain what a balance sheet reconciliation is, why it is important, and how to perform one.
What Is A Balance Sheet Reconciliation?
A balance sheet reconciliation is the process of verifying the balances reflected on the balance sheet against supporting documentation.
It is one component of the accounting close cycle. Before the closing process can typically begin, the information in the general ledger is verified against some type of supporting schedule or document.
This reconciliation is done to ensure that the financial position of the company is being represented accurately.
Why Is A Balance Sheet Reconciliation Important?
The balance sheet represents the financial condition of the business. It allows readers to garner information about the health of the business at a specific point in time.
The balance sheet is one of the most commonly referenced financial documents. It is used by a wide audience that includes owners, investors, regulators, and lenders. Because of this, it is extremely important to ensure that the balance sheet is represented accurately.
The balance sheet reconciliation helps to ensure that all of the information on the balance sheet is verified and representative of fact.
For example, the cash balance is reconciled to a bank statement. This gives readers confidence that the information is reliable and can be used for informed decision making.
The process is also an important aspect of a healthy control environment. Controllers implement account reconciliations to not only maintain accuracy but also to reduce risk of fraud.
Because information is being compared to factual evidence and supporting schedules it helps to highlight major discrepancies between the general ledger and reality.
How To Perform A Balance Sheet Reconciliation
The month-end close is often one of the most time consuming processes of an accounting department. One reason is the reconciliation process, which accounts for a large portion of the work.
The process of reconciling the balance sheet requires a great deal of information gathering. This is because at its core the process is largely cross-checking account balances and journal entries with supporting documentation.
There are four primary steps to reconciling a balance sheet.
Step 1: Gather Supporting Documentation
In order to reconcile the entries and balances with actual documentation, you first need to gather the documentation. It is an important first step that will help you begin the process methodically and organized.
The documentation needs to be for the time period that you are reconciling. For example, if performing a monthly reconciliation, gather information from the current month, but also any information that impacts the current month’s financials but happened in a different period.
The common support that is aggregated includes bank statements, receipts, some form of GL or account balance export, and any accrual or depreciation schedules.
The use of ancillary schedules is a common challenge that most accounting departments face. Disparate excel files containing various accounting schedules are a necessary evil in the corporate setting.
Modern applications are working to streamline these schedules and make it easier to reference and roll them during month-end closing.
Step 2: Comprare Documentation to Account Balances
Once you have all of your current period supporting documentation it is time to compare it to the balance sheet.
In this step be sure to maintain version control on any accounting system exports you do. It is important to have a reference to return to after the reconciliation is complete.
In reality, this step is broken into two smaller parts. One being the tying of the balance sheet line items to external support and the second being agreeing journal entries to the external support.
Reviewing the journal entries is the heart of the reconciliation, and it requires you to diligently match every value and entry with some form of documentation.
An important aspect of reviewing journal entries is ensuring that the proper accounts are being used. Again, this is one component of fraud detection in a good control environment.
After the journal entries are reviewed and verified, the documentation is compared to the ending balances represented on the balance sheet. For example, the bank statement will be used to verify the cash balance is accurate.
Step 3: Make Adjusting Journal Entries
Any discrepancy identified in step two needs to be addressed. Adjusting journal entries are used to reclassify transactions and in some cases entries might need to be added entirely.
It is important to note the importance of good version control when making adjusting entries. Be sure to maintain a balance sheet for each iteration of adjusting entries made to track the impact of the entry.
Step 4: Foot The Balance Sheet
Footing is a term used to add the values in the balance sheet to ensure that totals are accurate and that assets equal liabilities and equity. This is typically the final step in reconciling the balance sheet.
Using Datarails to Perform Balance Sheet Reconciliation
Every finance department knows how challenging it can be to perform a balance sheet reconciliation. Regardless of the budgeting approach your organization adopts, it requires big data to ensure accuracy, timely execution, and of course, monitoring.
Datarails is an enhanced FP&A solution that can help your team create and monitor budgets faster and more accurately than ever before.
By replacing spreadsheets with real-time data and integrating fragmented workbooks and data sources into one centralized location, you can work in the comfort of excel with the support of a much more sophisticated data management system behind you.
This takes budgeting from time-consuming to rewarding.