Balance Sheet Reconciliation: Process, Example and Checklist (2024)

9 July, 2024

10 mins

Balance sheet reconciliation is the process that ensures the accuracy of a company’s financial statements. It involves comparing the account balances in the balance sheet with the general ledger and supporting documents such as bank statements, credit card statements, and invoices.

Balance sheet reconciliation helps identify discrepancies or errors in the financial statements, providing the necessary support and evidence to ensure that the numbers are accurate. By cross-checking balances and entries, you can confirm that records are properly reflected and classified.

Moreover, by performing regular balance sheet reconciliations and following best practices, finance professionals and CFOs can ensure the accuracy and reliability of their financial statements, enabling informed decision-making and maintaining the trust of stakeholders.

Balance sheet account reconciliation is crucial for maintaining accurate financial reporting and ensuring regulatory compliance. Inaccurate financial statements can have severe consequences, such as regulatory penalties, loss of investor confidence, and reputational damage.Therefore, accurate financial reporting relies on robust accounting processes that includes solid internal controls, with balance sheet reconciliation being one of the most critical controls.

Regular balance sheet reconciliations help finance professionals and CFOs identify errors, discrepancies, and fraudulent activity. This enables them to take corrective action promptly and prevent financial loss.

Accurate and timely disclosures are crucial when seeking investors. The accuracy of a company’s balance sheet provides business decision-makers and external advisors, such as bankers and insurers, with a clear view of the company’s financial position, which is essential in making informed investment decisions.

When it comes to balance sheet account reconciliation, there are several important steps you need to follow to ensure the process is accurate and efficient. Here are the six key steps involved in an accurate balance sheet reconciliation process:

Step 1: Identify the accounts to be reconciled

This includes cash accounts, accounts receivable, accounts payable, inventory accounts, and any other balance sheet accounts that require reconciliation.

Step 2: Gather the necessary account information

This includes the general ledger for the account and any supporting documents, such as bank statements, invoices, or payment records.

Step 3: Compare the information

Next, compare the information from the general ledger to the supporting documents. This will help identify any discrepancies or errors that need to be addressed.

Step 4: Investigate any differences

This may involve reviewing transaction records, contacting vendors or customers, or examining internal processes.

Step 5: Make adjustments to the general ledger

Once you’ve identified the cause of any discrepancies, make the necessary journal entry adjustments to the general ledger account. This may involve adding or removing transactions, correcting errors, or updating balances.

Step 6: Complete account reconciliation and document

Ensure the ending balance on the general ledger matches the supporting documents. Investigate and resolve any discrepancies. Then, document the entire reconciliation process by creating a report or summary.

Subledger to general ledger reconciliation is part of balance sheet reconciliation. It is a crucial process that involves comparing the transactions recorded in the subledger for categories such as accounts payable (AP), accounts receivable (AR), and fixed assets (FA) with the corresponding transactions recorded in the general ledger. The purpose of this reconciliation is to ensure that the balances in the subledger and the general ledger accounts are in agreement and that there are no discrepancies or errors.

Here’s an example of balance sheet reconciliation:

In the above table, we see there is a mismatch between subledger and general ledger resulting in a discrepancy of $45,00. This may be due to:

• Manual entry is directly passed in the general ledger
• Master data setup issues due to which accounts are not mapped correctly to GL accounts
• Integration issues between systems

In the example given above, we see a discrepancy of $45,000 between the subledger balance and the GL balance. The accounts team now needs to investigate various documents to identify the reason for the discrepancy and make the necessary adjusted journal entries to ensure that the subledger and general ledger balances match.

In an ideal world, all transactions recorded in the subledger should always match the corresponding transactions recorded in the general ledger. This means that the sum of all transactions recorded in the subledger should be equal to the balance of the corresponding general ledger account. For example, the total amount of all accounts payable transactions recorded in the AP subledger should match the balance of the accounts payable account in the general ledger.

However, in reality, there may be discrepancies between the subledger and general ledger balances, making it essential to perform regular balance sheet reconciliation to identify and correct any discrepancies.

Balance sheet reconciliation can be challenging for companies to execute effectively. Here are some of the common challenges that companies face during balance sheet reconciliation:

1. Disparate and disconnected data:

One of the most significant challenges that companies face is disparate and disconnected data. Financial data is often stored in different systems and spreadsheets, making it challenging to consolidate and reconcile the information. This can result in errors and inconsistencies in the financial statements. It’s crucial for companies to have a centralized system for storing and reconciling financial data to avoid errors and discrepancies.

2. Manual processes:

Manual processes and outdated technology can lead to errors and delays in financial reporting, making it unsustainable for growing businesses. Legacy technology and disconnected data from multiple sources can also make it difficult to reconcile financial statements accurately. Manual data entry and reconciliation are time-consuming and prone to errors. This can result in delays in the financial close process and errors in the financial statements.

3. Lack of internal controls:

Without adequate oversight and control, it’s challenging to track the status of the reconciliation process, identify issues, and ensure that corrections are made promptly. Companies must establish clear policies and procedures for balance sheet reconciliation and implement robust internal controls to ensure the accuracy of financial statements.

4. Inaccuracies due to shortened cycles:

Many companies are under pressure to shorten their financial close cycle to provide timely and accurate financial information to stakeholders. Although a fast close is impressive, it can also compromise quality for speed. Companies that close within a short window often rely more heavily on estimates and accruals, which may not be exact. This makes the review stage critical.

5. Spreadsheets increases error risk :

While spreadsheets are versatile and commonly used in finance, they are prone to errors and can lead to incorrect assumptions about the accuracy of financial data. According to a study by IBM, 88% of all spreadsheets contain at least one error. Companies that rely heavily on spreadsheets for balance sheet reconciliation may find it challenging to keep up with the pace of business and ensure the accuracy of financial statements.

Effective balance sheet reconciliation processes can be time-consuming and prone to errors, making them a significant challenge for many organizations. By implementing best practices for overcoming balance sheet reconciliation challenges, companies can streamline the process, reduce errors, and improve the accuracy of their financial statements. Here are the eight key practices to consider:

1. Implement automation and pre-configured routines:

Automating the reconciliation process with pre-configured routines can save time and reduce human error. Automated solutions can match transactions, manage intercompany reconciliations, streamline balance sheet certification, and close task checklist management. Pre-configured routines simplify the comparison of account balances and identify discrepancies. Combining these approaches can help the finance team focus on value-adding analysis and investigation.

2. Leverage technology to facilitate collaboration:

Technology solutions can facilitate collaboration between different departments involved in the reconciliation process. For instance, cloud-based platforms allow for real-time updates and communication between team members. This can help reduce the risk of errors and ensure that the reconciliation process is completed efficiently.

3. Establish clear policies and robust internal controls:

To enhance balance sheet reconciliation, companies should establish clear policies and robust internal controls. Clear policies provide guidelines for identifying discrepancies and approving financial statements, while internal controls, such as segregation of duties and regular reviews, prevent fraud and improve accuracy. By combining policies and controls, companies can ensure a reliable reconciliation process.

4. Empower your team with training and support:

Providing training and support to accounting teams can help improve the accuracy and efficiency of the reconciliation process. This includes providing training on new technology solutions and best practices for reconciling financial data. Investing in team development also helps improve job satisfaction and employee retention.

5. Regularly review and use risk assessment to prioritize reconciliation efforts:

Regularly reviewing and updating the reconciliation process, along with prioritizing thorough risk assessment, can help improve the efficiency and accuracy of the process. By identifying bottlenecks, inefficiencies, and high-risk accounts, companies can make the necessary adjustments to ensure that the reconciliation process is optimized. Continuously reviewing and improving the process can help ensure that the financial statements are accurate and timely, while risk assessment can help prioritize efforts and ensure that high-risk accounts and transactions are given priority.

Accounting technology has revolutionized the way companies manage their financial data, including the balance sheet reconciliation process. By automating manual tasks and reducing the risk of human error, accounting technology can help streamline the process and improve accuracy. This is especially important because, as organizations grow, their financial data becomes more complex, making reconciliation all the more important as well as challenging. Here are some key capabilities of modern accounting solutions:

1. Automated workflow

   Automated accounting solutions can create account reconciliation project plans and assign specific GL accounts to users for enhanced reconciliation task completion. This helps streamline the process and ensures that all necessary tasks are completed in a timely and efficient manner.

2. GL account-specific reconciliation templates

   Automated solutions allow users to leverage standard reconciliation templates or create their own templates to accelerate the reconciliation process. This feature reduces the time and effort required to complete each reconciliation and helps ensure consistency across all reconciliations.

3. AI-powered matching

   Ai-powered automated accounting solutions can provide a set of existing matching rules or algorithms to reconcile any two sets of data, such as GL and subledger or GL and bank statement. This feature helps reduce manual effort and improves accuracy by automating the matching process.

4. Collaborative workspace

   With automated solutions, reconcilers can share their work papers for each reconciliation for review and approval by the reviewer. Users can provide inputs to complete the reconciliation, improving communication and collaboration between teams.

HighRadius’ comprehensive AI-powered Record-to-Report suite helps you and your company optimize cash flow management and decrease reconciliation delays. It allows you to streamline and improve your business’s account reconciliation processes. By leveraging out of the box AI transaction matching rules you can automate the reconciliation process and achieve a 95% journal posting automation.

With real-time reconciliation capabilities, HighRadius ensures that your financial records are updated daily. This is particularly helpful to organizations where a large number of transactions take place every day. Its powerful matching algorithms quickly identify and resolve variances, increasing speed and accuracy.

HighRadius’ transaction matching uses AI to identify and set matching rules, allowing for automatic line-level transaction matching across many data sources. This dramatically minimizes the manual effort involved in reconciling transactions, resulting in a 30% reduction in the number of days required to reconcile accounts.

Further, HighRadius’ Reconciliation Control Tower provides you with a centralized view of your reconciliation tasks, with real-time updates of active general ledger account status, including identification of variances and certification statuses. This helps to get an overview of the close reconciliation process and enables in ensuring that your financial records are accurate.

By automating and improving the bank reconciliation process, HighRadius provides your company with what it needs to ensure accurate, efficient, and compliant financial management.

1. What is the difference between a balance sheet and reconciliation?

A balance sheet displays a company’s assets, liabilities, and equity at a given time, while reconciliation checks the consistency and accuracy of accounts by aligning and comparing balance sheet figures with financial records and thus rectifying discrepancies as needed.

2. What makes a good balance sheet reconciliation?

A good balance sheet reconciliation requires accuracy, completeness, and timeliness. It involves employing best practices like automation, clear policies, robust controls, regular reviews, and risk assessments to promptly identify and rectify discrepancies, preventing financial loss.

3. What is an example of balance reconciliation?

An example of balance reconciliation involves comparing a company’s bank statement with its internal cash records. Accountants check each transaction, identify discrepancies (like missing transactions or errors), and adjust the records to ensure they match, ensuring accuracy and completeness.

4. Why do we only reconcile balance sheet accounts?

We focus on reconciling balance sheet accounts because they reflect a company’s assets, liabilities, and equity at a specific point in time. Accurate reconciliation ensures the integrity of the financial position, identifies errors, and helps prevent fraud, providing a clear financial snapshot for stakeholders.

5. What are the challenges of data reconciliation?

Challenges of data reconciliation include dealing with large volumes of data, discrepancies due to timing differences, human errors, and inconsistent data formats. Additionally, integrating data from multiple sources and ensuring accuracy while maintaining efficiency can be complex and time-consuming.