Complete Guide to Balance Sheet Reconciliations

No matter what role you play in your accounting team, you know that there are no way around account reconciliations and balance sheet reconciliations. The days of storing information across spreadsheets and manually recording transactions should be a thing of the past, yet many organisations still operate under these conditions. 

With information from a balance sheet, a business owner has a clear understanding of how the business is performing. If all goes well, account reconciliation makes sense and is accurately representative of the business’ transactions to match its bank statements. However, this tedious task and the highly necessary procedure can easily cause unnecessary stress on a financial team and be rife with mistakes, especially as the business grows through new customers or acquisitions. It becomes even more complicated when staff are on holiday or sick during the process.

As such, technology and automation have paved the way to expedite this process, improve accuracy, require less reliance on key staff and save money while doing so. Here, we will take a look at the importance of balance sheet reconciliation, how automation tools can assist in the process, and how manual tasks could become obsolete. Therefore, your accounting team can be freed up to focus their time on human analytical tasks, rather than back-office transactional maintenance.

Table of Contents

1. What is Account Reconciliation

2. What is Balance Sheet Reconciliation

3. Advantages of Balance Sheet Reconciliations

4. What are the Common Pitfalls of Balance Sheet Reconciliation?

5. How to Overcome Challenges of Balance Sheet Reconciliation?

6. How to Improve & Streamline the Process

7. What are Internal Controls

8. What is the Balance Sheet Reconciliation Checklist?

9. Review of the Best Practices

10. Bottom Line

What is Account Reconciliation? 

Account reconciliation is the process of matching internal accounting records to ensure they line up with a company’s bank statements. Account reconciliation relies on large organisation and the upkeep of invoices, account balances, balance sheet reconciliation and more. 

What is a Balance Sheet Reconciliation?

In every business, balance sheet reconciliation takes place in defined intervals, be it monthly, quarterly, yearly, etc. Balance sheets list assets and liabilities, and every transaction must be categorised as one or the other. During reconciliation or the closing of accounts, a business has the chance to ensure that everything has been documented accurately.

As you know, your balance sheet is one of the essential documents in your business. It can help prove creditworthiness for a bank loan or show you and investors how a company is doing. Typically, balance sheet reconciliations involve the closing of the following accounts: 

• Cash 
• Accounts Payable
• Accounts Receivable 
• Payroll Liabilities
• Accrued Liabilities
• Loans and Debt 
• Prepaid Expenses
• Inventory 
  

With all the moving parts, it’s easy to see how things could go wrong or be missed. That’s why it’s useful to follow these simple best practices during the reconciliation process: 

• Have a basic understanding of the accounting principles by which the law operates  
• Maintain up-to-date information 
• Pay close attention to accounts with unusual balances 
• Review the balance sheets closely 
• Review the process overall and look for improvements 
• Use standard templates or consider implementing automation to handle this for you! 

Advantages of Balance Sheet Reconciliations

It should come as no surprise that balance sheet reconciliations are imperative for a business, from both a regulatory and compliance standpoint as well as a functional perspective. From being an essential accounting practice to serving as a measure to ensure the accuracy of financial statements, such reconciliations provide crucial insights into your business. 

Imagine a world where accounts are reconciled infrequently. For example, your business deposits a check. Your bank balance has increased, but that money may have already been deducted as part of paying vendors’ invoices. Therefore, your cash position isn’t accurately depicted by the bank account alone. But, if you perform a balance sheet reconciliation, you will be able to see your cash position correctly, and through data, automation can even be in real-time. This is imperative to function successfully as a business to be able to make the best financial decisions. 

The increased transaction transparency offered by reconciliations will show where you are spending and making your money. If you are looking to improve efficiency and cut costs, such documentation will serve as proof as to where you can make this happen. 

The bottom line (no pun intended) is that you need to know where you stand. But, this process shouldn’t keep you up at night. Balance sheet reconciliations can be labour intensive and time-consuming. They often lack control and oversight, making them error-prone. But, data automation can solve all of these challenges so that the advantages of reconciliation can prove their power, making the process streamlined, free from error, less reliance on key staff, real-time and with audit trails thereby enhancing compliance. 

What are the Common Pitfalls of Balance Sheet Reconciliation?

The Excel spreadsheet was once a beacon of hope for accounting teams everywhere. And, while it’s still a powerful tool, it can easily become a horrible master. If you’re stuck relying on the use of spreadsheets for balance sheet reconciliation, you’re going to run into a slew of hurdles, including:

Disparate Data

With more teams working remotely than ever before, siloed data causes even greater risks. If data is stored across desktops on spreadsheets, it’s not connected, which means it may be outdated or duplicated.

Along with the data existing across computers, it means that your team needs to work to manually collect data from different sources, which is a huge time suck.

Time Wasting

Manual transaction matching takes a lot of time. Combined with the collecting data phase, the cross-referencing means that your team will spend a ton of time being bogged down with manual labour.

Not to mention that the time needed to perform balance sheet reconciliation only grows with your transaction volume and use of multiple payment processors like PayPal, Stripe, and the like.

Manual Errors

As talented as your team is, manual errors are inevitable when working with data by hand. This is increasingly risky when it comes to financial information and the generation of financial statements as it can affect your business’ decisions.

How to Overcome Challenges of Balance Sheet Reconciliation?

The best and simplest way to overcome the manual challenges of balance sheet reconciliation is to remove the need for manual labour! You can do this with the aid of financial automation tools that reconcile accounts for you automatically.

Here are some recommendations to streamline the process:

1. Utilise Automation Solutions

Manual labour creates bottlenecks and runs the risk of key person dependencies. With automation tools implemented, you can prevent error-prone and time-consuming manual tasks. At the same time, this means that your team will then have more time to allocate to value add responsibilities, creative solutions, and strategic thinking.

2. Leverage Pre-Configured Workflows

With automation solutions, you also have the opportunity to make use of pre-designed workflows across the board. Not only does this expedite the process, but it also makes it possible to standardise the process throughout the organisation.

For example, if you choose to deploy a reconciliation tool like SolveXia, you can take advantage of its library of functions and develop your own processes using drag-and-drop functionality.

3. Automate Approval Processes

Last but not least, approval processes are your fail-safe. But, when performed manually, the process can get stuck in paper trails or in the inbox of the final reviewer. Automation solutions like SolveXia make it possible to automate the approval process to ensure that nothing gets stuck in its tracks.

How to Improve & Streamline the Process

By using account reconciliation software, you can remove the literal paper trail, and your team can be freed from tedious tasks. Automation software will enhance internal controls and increase transparency within an organisation of any size. 

Software systems can pull data from multiple sources, store data safely and map and cleans the data, so the necessary data is input into the right places making reconciliation more straightforward, more accurate, quicker and easier. If the process were less demanding of personnel, you would likely perform it more frequently, for example, weekly or even start new reconciliations. Therefore, you would always have a pulse on your organisation’s financial health. 

What are Internal Controls?

When working on balance sheet reconciliation within an organisation, more than one person likely has access to the spreadsheets and account information. As such, any changes that are made are not always recorded. So, if one person touches a document and inputs an error, your entire process could become negatively impacted. Without version control or internal controls to regulate information accuracy, you are putting your whole business at risk. 

How do you control for this? 

Since you can’t rely solely on auditors, internal controls putting your team in a position to be the first line of defence with reviews and strick checks carried out by team members on each other work, the second line of protection can be a dedicated department that oversees account reconciliations. For example, an internal compliance team that checks for any weaknesses in the process. However, all of the above can be significantly optimised and better protected with the aid of data automation technology. With software, you can create a version history of stored data, and automatic uploads or data feeds, as well as data restrictions on individuals. This means every action can be tracked and traced back and when an error arises. This means not only will you be able to catch it quickly, but you will be alerted to the cause so you can correct and also fix the erroneous process step so stop it repeating. 

What is the Balance Sheet Reconciliation Checklist?

Using an automation solution (or working through balance sheet reconciliation manually) requires that the following four main steps are taken care of. Consider this your checklist for success so you can make sure you’re hitting every mark:

1. Collect Documentation

Pull together your internal and external documentation. Necessary documents include: bank statements, receipts, general ledger or account balance export, and the like. Automation solutions will pull together all this data for you in no time.

2. Compare Data Across Documents

The heart of reconciliation is transaction matching. With all your documentation in front of you, it’s time to cross-check. As you can tell, this is what can take a ton of time (unless you automate it!).

3. Adjust Entries

Should there be any discrepancies that were found, adjustments to journal entries will need to be made to rectify them. Version control is of paramount importance here!

4. Foot the Balance Sheet

This is where you ensure that balance sheet totals equate your assets to the liabilities and equity. That’s the last step!

A Review of Best Practices

Balance sheet best practices involve proper setup and review. Here’s an overview of what you should check for: 

Setup

• Identify accounts to reconcile 
• Ensure that the appropriate accounting principles are being used (whether it’s for the United States or international) 
• Run relevant reports
• Make sure dates are recorded properly
• Define an execution procedure 
• Place dedicated personnel in charge 
  

Review 

• Ensure timely review of reconciliations while accounts are still open to modifying for any errors
• Provide all the necessary documents for analysis (i.e. general ledger and bank statements)
• Make sure the reconciliation supports the balance itself 

The Bottom Line

Balance sheet reconciliations should provide more benefits than harm to your business. 

Since balance sheets are like a report card for your business, they should accurately reflect its performance within any given time. 

With automation tools, you and your financial team can sleep easier at night, knowing that human errors can be avoided. The world of spread out spreadsheets and manually tracking transactional data is a world of the past. Welcome to a new frontier where software systems and data work together to help your business function better, faster and stronger.

To see how SolveXia can help your company perform its balance sheet reconciliations, request a demo!