Key Takeaways
1. Balance sheet reconciliation ensures financial accuracy by comparing ledger balances with source documents to identify discrepancies, helping businesses maintain integrity and compliance with regulatory standards.
2. Regular reconciliation prevents errors, reduces fraud risk, and ensures reliable financial reporting, offering stakeholders a clear view of the organization’s financial health and performance.
3. Automated tools in reconciliation improve efficiency, saving up to 50% of time spent on manual tasks and significantly reducing human error in accounting processes.
A balance sheet is one of the most important financial documents for any organization of the business.
This document alone can show the true image of a business’s performance over the past year or any other period.
It shows whether the decisions taken by the organization and its management have been beneficial for the business or not.
Additionally, it also shows the total assets present with an organization as well as the total liabilities it owes to third parties.
Let’s talk about this in detail.
What is Balance Sheet Reconciliation?
The procedure of balance sheet reconciliation is associated with closing all the accounts or books of accounts present with an organization and recording them in the actual balance sheet.
This process allows businesses to ensure that the data gathered and recorded in the balance sheet is perfect and trustworthy.
Additionally, it also ensures that the data from the accounts is the last to date and the same can be closed now if required.
Every transaction and data occurring now will fall into the next balance sheet cycle.
Benefits of Balance Sheet Reconciliation for a Business
There are varied benefits of involving in the procedure of balance sheet reconciliation for any business.
However, in the next section, we have dealt with the top ones only to help you understand better and quicker. So, let’s have a look at the benefits right away.
1. Find Out Omissions and Human Errors
One of the biggest and most obvious benefits of reconciliation is that it allows companies to reduce the chances of omissions. Being only human, sometimes the executives of the business may omit or forget to enter accurate data in the balance sheet. The executive may even record the wrong number in the balance sheet overheads.
The process of balance sheet reconciliation allows the business to catch such discrepancies and even hold a person (s) accountable for the error. This allows businesses to ensure that the data entered in the final financial statement is always accurate and reliable.
2. Find Out the Fraudster
At times, the company’s own employees may become the reason behind the damage to the organization. There can always be a black sheep in the office. It’s the responsibility of businesses to protect themselves from such black sheep. One way to do this is to take the help of balance sheet reconciliation.
Using reconciliation, the business can easily pin out the party(s)involved in the fraud and punish them as required. This allows the business to be a little strict with the executives and creates a feeling of fear from the consequences of their fraudulent acts. This way, the employees and executives will always be motivated to deliver the best services without any cheating.
3. Strengthen Internal Control
The definition of concept defines what is balance sheet reconciliation, but it does not define its impact on the internal control of the organization. If the reconciliation is done accurately and perfectly, then the business and its top-tier management team can figure out the weak spots in internal control and work to strengthen the same.
They can figure out the department or the people who are not working or performing up to the requirements of the businesses and come up with new ways to motivate them to work to a certain level. All this is done to ensure the long-term good of the business.
4. Cash Flow Management
If the balance sheet reconciliation is done with respect to the bank statements of a business, the organization can figure out the flow of cash. The business can ascertain the areas it needs to work on to get in more cash for the business. Additionally, the reconciliation will also help with cash forecasting. If the reconciliation is done perfectly, a business can ascertain the accuracy of the data within as well predict the inflows and outflows of the cash in the near future.
5. Attract More Investors
Investments and balance sheets go hand in hand. When investors come to know that the data present in the sheet is accurate and presented after undergoing balance sheet reconciliation, trust is built in their heads. This way, you can simply motivate the investors to be interested in investing more funds in your business. This also boosts the morale of the employees present within, brings more profits, and provides the opportunity for the business to grow by generating more business.
6. Accurate Filing of Tax
One of the major benefits of balance sheet reconciliation and the reason why smart businesses are also motivated to use the technique is the tax filing benefits. When the data in the balance sheet is accurate, the business can easily figure out the actual and reliable tax liabilities of the business and file the tax afterward accordingly.
Additionally, when businesses file the tax accurately and regularly, they can also keep the complications from the IRS, like anonymous audits, at a distance. An audit may not seem like a big deal, even if you are not involved in any fraudulent activities, but can be troublesome if any omission or human error is found. Additionally, audits also break down the morale of the peers involved with the business in any way.
How To Do Balance Sheet Reconciliation?
The process to execute a balance sheet reconciliation is quite simple. Closing balances of every overhead related to the assets & liabilities must first be established in order to conduct the reconciliation. The balance (net) of each asset and liability is then calculated. The balance (net) of assets & liabilities must be equal in the last phase. If the total data matches, the values are thought to be accurate. However, if any discrepancies appear, there may have been some mistakes made during the recording of the transactions and/or the general ledger. The same needs to be found and fixed. Below is the entire format of a reconciliation table:
| Particulars | Amount | Amount |
|---|---|---|
| Assets | ||
| Net Fixed Assets | XX | |
| Net Current Assets | XX | |
| Net Investments | XX | |
| Total Assets (A) | XX | |
| Liabilities | ||
| Share capital | XX | |
| Borrowings | XX | |
| Net Current Liabilities | XX | |
| Total Liabilities (B) | XX |
In the above table, the data or amount of A and B should always match for the balance sheet to be perfect and accurate. Let’s have a look at a balance sheet reconciliation example to understand better.
Balance Sheet Reconciliation Example
Now that the definition and the benefits of the reconciliation are clear, let’s understand the same with the help of an example.
The data derived from the books of accounts of XYZ Ltd. is as follows:
| Accounts or Overheads | Amount |
|---|---|
| Equity capital | 120,000 |
| Preference capital | 30,000 |
| Fixed assets | 217,000 |
| Reserves and surplus | 20,000 |
| Cash and bank | 35,000 |
| Debentures | 10,000 |
| Marketable securities | 18,000 |
| Term loans | 9,000 |
| Receivables | 20,000 |
| Short-term bank borrowing | 7,000 |
| Inventories | 21,000 |
| Trade creditors | 6,000 |
| Provisions | 2,000 |
| Prepaid expenses | 10,000 |
The balance sheet reconciliation for the same data would be as follows:
| Assets | Amount |
|---|---|
| Fixed Assets: Net | 217,000 |
| Investments: Marketable Securities | 18,000 |
| Current Assets (Prepaid Expenses, Inventories, and Receivables) | 420,000 |
| Cash & Bank | 35,000 |
| Total Assets | 690,000 |
| Liabilities | Amount |
|---|---|
| Share Capital (Equity and Preference) | 150,000 |
| Reserve and Surplus | 200,000 |
| Loans (Debentures, Term Loans, and Short-term bank borrowing) | 260,000 |
| Current Liabilities (Provisions and Trade Creditors) | 80,000 |
| Total Liabilities | 690,000 |
As you can see from the above table, the data from both the assets and liabilities match. This means that the data collected from the sheets were accurate and reliable. The exact process to execute reconciliation must be clear from the above balance sheet reconciliation example. Let’s know what problems can be faced during the reconciliation.
Issues with the Balance Sheet Reconciliation
While the concept of reconciliation may seem to be simple when everything is done manually, the logistics may be a complete nightmare. This is particularly true when companies expand and accounting staff finds it difficult to stay up.
The traditional, manual methods of accounting are no longer viable due to all the tasks involved in the closing, including checking off checklists, performing reconciliations, submitting journals, marking and bringing together some unmatched transactions, and performing analysis from past data.
These procedures call for substantial usage of spreadsheets and a tremendous amount of manual, repetitive labor, and have become even more difficult because of obsolete technology and unconnected data from many ERPs, sub-ledgers, banks, and various other sources.
The Solution to the Challenges of Reconciliation of Balance Sheet
There is varied advantages of using reconciliation in any business. However, the manual or outdated technique of reconciliation is posing some problems for the business. To get over these, your business needs Manufacturing Accounting Services to be involved in the advanced and modern techniques of reconciliation. If you want any help with the same, you can seek assistance at the Ledger Labs.
Our accounting and bookkeeping experts will help you rectify the omissions and mistakes from the balance sheet and also help you catch the fraudster amidst your business if any. They will undertake the complete process of balance sheet reconciliation for you and take care of the same in a duly professional manner.
