What is a Balance Sheet Reconciliation?

Reconciliation of the balance sheet means the reconciliationReconciliationCompanies do reconciliation prior to closing their books of accounts to match balances in different accounts and to account for the double effect of journal entries. It assists in ensuring that the books are up to date and that there is no manipulation, fraud, missing, or incorrect entries in the firm’s books of accounts.read more of closing balances of all transactional and ledger entries and accounts. It forms part of the balance sheet itemsBalance Sheet ItemsAssets such as cash, inventories, accounts receivable, investments, prepaid expenses, and fixed assets; liabilities such as long-term debt, short-term debt, Accounts payable, and so on are all included in the balance sheet.read more for a respective financial year and whether it is recorded and properly classified, making up for the balances appropriately in the balance sheet. It is a final and crucial activity that the company performs to ensure the accuracy of its financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more before the closing of its books at the end of the financial cycle.

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Types/Components of Balance Sheet Reconciliation

There are two formats in which a balance sheet can be prepared. One is the horizontal format, called the T-format, and the other format is the Vertical Format. Presently the vertical format is widely being in use. The contents in both formats are, however, the same. It is only the way it gets presented that is different.

The balance sheet components of the balance sheetcomponentsA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more comprise data, which would either increase or decrease revenue. Hence many of these would have already been computed. In contrast, the preparation of income and expense / Profit and Loss statements, and a few would be carried forward from the previous year’s balances shall merely have the final balances available in these accounts.

Ideally, a balance sheet would have the following components:- “Assets, Liabilities, and Owner’s Equity.”

  • Assets are items that would likely increase or generate revenue for the company: cash, receivables, inventory, prepaid expensesPrepaid ExpensesPrepaid expenses refer to advance payments made by a firm whose benefits are acquired in the future. Payment for the goods is made in the current accounting period, but the delivery is received in the upcoming accounting period.read more, and fixed assets, etc.LiabilitiesLiabilitiesLiability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company.read more are items that would likely decrease the revenue for the company. Examples: Debts, accounts payableAccounts PayableAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.read more, payroll and taxes payable, notes payableNotes PayableNotes Payable is a promissory note that records the borrower’s written promise to the lender for paying up a certain amount, with interest, by a specified date. read more, deferred revenueDeferred RevenueDeferred Revenue, also known as Unearned Income, is the advance payment that a Company receives for goods or services that are to be provided in the future. The examples include subscription services & advance premium received by the Insurance Companies for prepaid Insurance policies etc. read more, and customer deposits, etc.There is no such formula to calculate the balance sheet as it is a statement to match the total liabilities with total assets. However, this can be represented in the following form:- Assets + Owners Equity = Liabilities.

Balance Sheet Reconciliation Template

Below is the Template of the Balance sheet reconciliation.

Examples of Balance Sheet Reconciliation

Now, let’s see some examples of the Balance sheet reconciliation.

Balance Sheet Reconciliation Example #1

Following is the trial balanceThe Trial BalanceTrial Balance is the report of accounting in which ending balances of a different general ledger are presented into the debit/credit column as per their balances where debit amounts are listed on the debit column, and credit amounts are listed on the credit column. The total of both should be equal.read more of M/S ABC at the end of the year. Prepare a balance sheet for the same.

Solution:

Below is the reconciliation of the Balance Sheet.

We note here that the total net assets are equal to total net liabilities (740,000)

Balance Sheet Reconciliation Example #2

At the end of March, 20X6 the balances in the various accounts of ABC & Company are as follows:

Prepare the balance sheet of ABC & Company as per the format.

Below is the balance sheet reconciliation.

Again, we see that the total assets are equal to total liabilities.

Advantages

Reconciling the balance sheet shall provide many and multiple benefits. However, a few of the key and main benefits are:

  • Eliminates accounting errorsAccounting ErrorsAccounting errors refer to the typical mistakes made unintentionally while recording and posting accounting entries. These mistakes should not be considered fraudulent behaviour first-hand as this can happen with anyone and by anyone.read moreTo better understand and evaluate the financial strength of the company

Disadvantages

Manual reconciliation of balance sheets or accounts is prone to errors due to the manual intervention involved. Hence it involves a risk of data manipulation, missing the recording of data, etc.

It has been a guide to Balance Sheet Reconciliation. Here we discuss how to reconcile the Balance sheet using closing balances, ledger entries, accounting transactions, and practical examples. You can learn more about accounting from the following articles –

  • Balance Sheet RatiosHow to Read a Balance Sheet?Examples of Balance SheetEquation of Balance Sheet