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

12 June, 2023

25 min

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

Reconciliation of balance sheet helps identify any 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 each entry, 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 them to make informed decisions and maintain the trust of stakeholders.

Why Balance Sheet Account Reconciliation is Essential for Your Business

Balance sheet account reconciliation is crucial for maintaining accurate financial reporting and ensuring compliance with regulatory requirements. Inaccurate financial statements can have severe consequences, including regulatory penalties, loss of investor confidence, and reputational damage.

Therefore, accurate financial reporting relies on an accounting process 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.

In addition, having accurate and timely disclosures is 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 any necessary 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.

Here’s an example of balance sheet reconciliation

Sub-ledger to general ledger reconciliation is a part of balance sheet reconciliation. It is a crucial process that involves comparing the transactions recorded in the sub-ledgers 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 sub-ledgers and the general ledger accounts are in agreement, and that there are no discrepancies or errors.In the above table, we see there is mismatch in Subledger and General Ledger which may be due to:

• Manual entry passed in general ledger directly

• Master data setup issues due to which accounts are not mapped correctly to GL account

• Integration issues between systems

In an ideal world, all transactions recorded in the sub-ledgers should always match the corresponding transactions recorded in the general ledger. This means that the sum of all transactions recorded in the sub-ledger 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 sub-ledger should match the balance of the accounts payable account in the general ledger.

However, in reality, there may be discrepancies between the sub-ledger and general ledger balances due to various reasons such as errors in data entry, timing differences, or system glitches. Therefore, it is 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. As per a research by EY, existing repositories like asset registers, core accounting and forecast systems as well as ERP are likely to only provide around 50% of the required data points. 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, but 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 among multiple teams and stakeholders:

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 it 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, and 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 can also help 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 through risk assessment, can help improve the efficiency and accuracy of the process. By identifying bottlenecks, inefficiencies, and high-risk accounts, companies can make 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 as organizations grow and their financial data becomes more complex. Here are some key capabilities of these solutions:c

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

• 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.

• AI-powered matching: Automated 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.

• 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.

By leveraging these capabilities, businesses can streamline their balance sheet account reconciliation process and reduce the risk of errors and delays. Automated solutions can help improve the accuracy of financial statements, reduce the time and resources spent on manual tasks, and provide valuable insights into the reconciliation process.

HighRadius’ AI-based account reconciliation software can help streamline the entire balance sheet reconciliation process. The software offers automated workflow management, GL account-specific reconciliation templates, AI-powered matching, and a collaborative workspace for review and approval.

Automated workflow management allows you to create project plans and assign specific GL accounts to R2R analysts or user groups for enhanced reconciliation task completion. The ability to leverage standard reconciliation templates or create custom templates can accelerate the reconciliation process. AI-powered matching provides existing matching rules or algorithms to reconcile any two sets of data, such as GL and subledger or GL and bank statements. This can help eliminate manual effort and reduce the risk of errors.

HighRadius’ collaborative workspace for review and approval allows you to share your work papers for each reconciliation, providing inputs to complete the process. This can help reduce the time taken to resolve issues and allow for greater collaboration between departments.

Benefits of HighRadius’ AI-Based Account Reconciliation Software:

– Reduce reconciliation assignment time by 80%- Improve reconciliation accuracy by 90%- Faster identification and resolution of anomalies

– Improve compliance and risk management

By leveraging HighRadius’ AI-based account reconciliation software, your business can streamline the entire balance sheet reconciliation process, reducing manual effort, and improving accuracy. The software’s advanced features can help eliminate errors, provide real-time insights, and improve collaboration between departments. With HighRadius, your business can achieve a more efficient and accurate balance sheet reconciliation process.

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

A balance sheet displays a company’s assets, liabilities, and equity at a given time, while reconciliation checks consistency and accuracy by aligning balance sheet figures with financial records, 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.