Also known as the statement of financial position, the balance sheet is a financial statement sought after by your client, showing the financial state of their business at any point in time. Its main job is to provide an overview of the value of assets, liabilities, and equity, and balance sheet reconciliation plays a critical role in ensuring these figures are accurate and reliable. Together with the profit and loss statement and cash flow statement, proper balance sheet reconciliation helps clients and stakeholders clearly understand the financial health of a business and make informed decisions with confidence.
To understand how a balance sheet is prepared you can take a look at our blog. However, while preparing it, mistakes can be made by your accounting teams for various reasons. Among these reasons is dealing with vast volumes of financial transactions daily, especially when your client’s business is expanding. Hence, to find these mistakes accounting practices like yours must perform a balance sheet reconciliation. In this blog, we will focus on what is balance sheet reconciliation, how it is done, and what are the best practices and challenges associated with balance sheet reconciliation.
Let’s dive into bank sheet reconciliation in detail:
What is A Balance Sheet Reconciliation?
Under the balance sheet reconciliation process, a comparison is made of the transactions in the balance sheet with other documents. By doing this, you can identify discrepancies and remove them before they can negatively affect or come to the attention of your clients or HMRC. The documents that can be used for the balance sheet reconciliation are bank statements, invoices, and spreadsheets, to name a few. With balance sheet reconciliation, you can now prepare a balance sheet with accurate numbers, thus reflecting an accurate financial position of your client’s business and maintaining their trust in you.
The importance of balance sheet reconciliation can be recognised by the fact that with it, your clients can know their financial position accurately. Additionally, it also does the following things:
- Gives clients more confidence in their account balances
- Surface errors before they have a downstream impact
- Creates a clear path for solving discrepancies
- Keeps client’s business compliant with standards and regulations
- It creates documentation for future reference.
- Helps create a paper trail for future audits
Balance sheet reconciliation is performed alongside financial closes, so monthly reconciliations occur at the same time as the month-end close. However, some of your clients may prefer balance sheet reconciliation on a quarterly or yearly basis.
You must have also heard the term bank reconciliation, which is almost identical apart from the scope and type of transactions reconciled. Balance sheet reconciliation focuses on reconciling transactions on the balance sheet, while bank reconciliation deals with the bank statements.
How to Reconcile the Balance Sheet?
It is important to recognise that balance sheet reconciliation is a time-consuming and labour-intensive process that accounting practices like yours will find difficult to fulfil. In that case, you can explore using the outsourced year end service offered by an accounting service provider.
To streamline the process, you will have to follow the below-listed steps:
Identify the Accounts That Need To be Reconciled
Depending on the type of business your client operates, you must reconcile only some accounts as part of the reconciliation process. It is important to identify the accounts to avoid duplication of work.
Gathering the Required Financial Information
To conduct, you will require data for cross-checking purposes. This time-consuming task can be avoided by handing over the reconciliation responsibility to an accounting outsourcing service provider offering year-end services.
Comparing the Information
After collecting the information, compare it with the transactions listed in the balance sheet. For example, when reconciling your accounts receivable ledger, you will compare transactions with invoices to identify discrepancies.
Conducting Investigations on the Errors Found
Identifying the problem is just the beginning; you will have to solve it. The problems identified can be as simple as typing mistakes or simple data errors. If you identify a major problem, launch detailed investigations to find the source of the error.
Rectify the Mistakes Identified
After identifying and investigating the errors, update the general ledger and relevant journal entries to ensure the balance sheet’s accuracy. Using accounting software expedites this step, saving you time.
Keep a Record of your Findings
It is important to keep a record of all the investigations done so that regulators, auditors, and other professionals can review them and understand your changes. This practice accelerates future reconciliations by identifying and documenting recurring issues.
Best Practices in Balance Sheet Reconciliation
By now, you must know how to perform, but it will still be time-consuming. However, we have identified specific practices that can reduce manual labour and costly errors. These best practices are as follows:
Focus on Automation
Manual tasks during the process burden your accounting team, leaving them no time for other crucial duties. Also, manual work increases the chances of human error. Hence, it would be ideal to use accounting software to automate labour-intensive tasks.
Using Technology to Improve Processes
Along with automation, technology can also improve the process by identifying and eliminating inefficiencies. Using technology, you can smoothen the most difficult process into something more manageable.
Create Internal Controls
Preventing errors is the best way to smoothen the process. To achieve that, you will have to place internal controls that can detect discrepancies immediately before they escalate into a bigger problem.
Professional accounting outsourcing service providers already follow most of the points listed above. If incorporating them is challenging for your practice, consider using a service provider’s outsourced year-end service.
What Kind of Challenges You Will Face While Doing Balance Sheet Reconciliation?
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Like various other accounting tasks, is challenging. Some of the common challenges associated with reconciliation are labour-intensive, time-consuming, and prone to errors. Some challenges also require further elaboration.
Lack or No Internal Controls
Your clients may not have a standardised internal control that covers all their departments. The result will be inaccurate ledgers, which you will have to use while preparing the balance sheet.
Errors and Inaccuracies
The more manual processes you use, the more likely errors and inaccuracies will occur. This will only lead to more time spent on balance sheet reconciliation, considering the errors and inaccuracies involved.
Disconnected Data
Bringing the data together is one of the most time-consuming aspects of balance sheet reconciliation. Multiple tools and spreadsheets often spread out the data, and hidden transactions frequently appear in a tool unused for months.
Conclusions
After reading this blog, you will have no doubts about how to reconcile a balance sheet, the best practices to follow, and the challenges involved. We are confident that you have the knowledge to conduct balance sheet reconciliation for your clients successfully and professionally.
However, we also understand this job’s time-consuming nature, which will impact your focus on other essential accounting tasks. To save time, you can use the outsourced year end service of Corient, an accounting outsourcing service provider based in the UK. Many accounting practices have benefited from our reconciliation services, and we’re excited to offer the same to you. For more details or to share your requirements, use our website contact form, and we’ll get back to you quickly.
