Balance Sheet account reconciliation is one of the key elements to closing the financial books. Reconciling the Balance Sheet is very important for a business; it confirms and ensures that everything on the Balance Sheet is accurate. Business owners need an accurate Balance Sheet to clearly understand the company’s financial position. It is critical for outside advisors such as bankers to evaluate the credit worthiness of your business. Every account on the Balance Sheet needs to be reconciled when an accounting period is being closed; this ensures accuracy of the data. Some of the most important accounts that need to be reconciled are the cash accounts, inventory, prepaid expenses, accounts receivable, and accrued liabilities.
Reconciliation of Cash Book Balance
The bank balance should match what is currently in the accounting software with the difference of uncleared checks. If the two do not tie, we cannot move forward with reconciling the Balance Sheet. Identify the discrepancy; make sure everything that cleared the bank is recorded in the financial software and also, any uncleared transactions more than 30 days old need to have an explanation to why it has not cleared the bank yet.
Reconciliation of Inventory
At the end of the accounting period, an inventory count should be performed. The physical inventory on hand should match the book balance. If there is discrepancy between the two, go with the physical count and make an inventory adjustment in the financial software. Further, identify what is causing the discrepancy. You may uncover theft, fraud
or abuse through this process.
Reconciliation of Prepaid Expenses
This is an asset account. It is used to defer the recognition of the expenses previously paid until the services/goods have been used. The procedure to reconciling this account is assuring that all the closing journal entries have been made and the balance at month end matches the prepaid expense schedule that is used to calculate the monthly expense.
Reconciliation of Accounts Receivable
This account is very important and determines how much money we should be collecting and when. Ensure that all the data in this account is accurate. Find out if there are any invoices that need to be written off or need to be followed up with. Any item in this account that is above 90 days past due needs to have an explanation as to why it is 90 days past due.
Reconciliation of accrued liability
This account is exactly the opposite of the Prepaid Expense account. This account holds a balance that we owe for services/goods that we have used, but not yet paid for. Reconciling this account is fairly similar to the Prepaid Expense account; match the book balance to the balance that is on the scheduled used to calculate the monthly adjustment to this account.
Performance a monthly Balance Sheet reconciliation is crucial to understanding and evaluating the financial position of a business. The above examples are only a few of the important items, but reconciliations should be performed on all the Balance Sheet accounts.