Balance Sheet Reconciliations by nettTracker

Balance Sheet Reconciliations by nettTracker

What are balance sheet reconciliations? For anybody that works in an accounting or bookkeeping firm, ‘Balance Sheet Recs’, is a term that is in frequent use. In simple terms, it means having a full understanding of the value displayed against any category on the balance sheet.

How complicated are balance sheet reconciliations? Sometimes, they are relatively straight forward. One of the simplest balance sheet reconciliations can be the bank account of the business. If there are no ‘uncleared funds’ in transit, the balance shown on the bank statement will be the exact value displayed on the balance sheet. If there are uncleared transactions, the balance sheet value will be the difference between the bank statement and the uncleared entries.

With the use of accounting software, other simple balance sheet reconciliations are trade debtors and creditors (Accounts Receivable and Accounts Payable). The balance sheet will display a value of each type, but our reports will provide a summary breakdown that will display the unpaid values that agree to the balance sheet totals.

When do balance sheet reconciliations become a little more tricky? Whenever we start making ‘provisions’ in accounting, things can get complicated, and fully understanding what makes up a balance sheet total is not always easy. Fixed Assets is one example. Equipment is purchased, and depreciation is the provision that will write the value down over time.

It can be common for ‘general provisions’ to be made. These can be estimates of expected income or expenditure and when a mixture of these adjustments have been made they can be impossible to fully reconcile. There can be a value within ‘accrued expenses’ or ‘prepayments’ but nobody knows what the values relate to.

Why are balance sheet reconciliations important? Well generally if we have a value on the balance sheet, be it an asset or liability, the double-entry that will either increase or decrease that value will affect the reported profits. If we’ve not yet prepaid costs that relate to future periods, our costs will be too high. On the flip side, we may need to accrue expenditure if our suppliers have not yet billed us.

How frequently should the balance sheet be fully reconciled? This will often depend on the size of the business, and its reporting requirements. Very often the balance sheet is only fully reconciled on an annual basis by CPAs / Accountants. The downside of this is that adjustments are only made annually, so one month often contains distorted values. Whenever possible, it’s better to make adjustments, and fully reconcile the balance sheet every month. This helps to produce consistent monthly profit and loss reports, as well as always having a thorough understanding of the values held on the balance sheet.