What is a Balance Sheet Reconciliation?
Reconciliation of balance sheet simply means the reconciliation of closing balances of all transactional and ledger entries and accounts forming part of the balance sheet items for a respective financial year and whether it is being recorded and properly classified making up to the balances appropriately in the balance sheet. It is a final and crucial activity which the company performs to ensure the accuracy of its financial statements prior to the closing of its books at the end of the financial cycle.
Types/Components of Balance Sheet Reconciliation
There are 2 types or formats in which a balance sheet can be prepared. One is the horizontal format or called the T-format and the other format is the Vertical Format. The contents in both the format are however the same, it is only the way it gets presented is different. Presently the vertical format is widely being in use.
The components of the balance sheet comprise of data which would either increase or decrease revenue. Hence many of these would have already been computed while the preparation on 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 which would likely increase or generate revenue for the company. Examples: cash, receivables, inventory, prepaid expenses, and fixed assets etc.
- Liabilities are items which would likely decrease the revenue for the company. Examples: Debts, accounts payable, payroll and taxes payable, notes payable, deferred revenue, 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
Given Below is the Template of the Balance sheet reconciliation.
|Balance Sheet as at MM/DD/YYYY|
|Intangible assets||xxx||This is the total value of development costs incurred by the business plus the cost of the licence it holds for selling its goods|
|Tangible assets||xxx||This is the cost of the business premises, furniture|
|and equipment, less depreciation charged since first using the assets|
|Investments||xxx||This is the value of shares owned in DEF Utilities PLC|
|Stock||xxx||This is the total value of goods bought from suppliers that have not yet been sold plus raw materials held for production plus the value of work in progress|
|Trade debtors||xxx||This is the total of the amounts customers owe, less bad debts and amounts considered uncollectable|
|Prepayments and accrued income||xxx||This is the maintenance fee payable annually in advance to the computer software company|
|Cash at bank and in hand||xxx||This is the total of cash kept on site and the balance on the business’ current account with the bank|
|Creditors: amounts falling due within One Year||Also known as current liabilities – liabilities are shown as negatives because they are amounts owed by the business|
|Bank loans and overdrafts||xxx||This is the portion of the business’ bank loan which is due to be repaid in the next twelve months|
|Trade creditors||xxx||This is the total of the amounts owed by the business to its suppliers for goods it bought to sell to its customers|
|Other creditors including tax and social security||xxx||This is the value of tax and national insurance contributions deducted from employee salaries that have not yet been paid over to the Inland Revenue|
|Accruals and deferred income||xxx||This includes interest due on the bank loan since the last repayment|
|Net current assets||xxx||Also known as working capital – this shows the business’ ability to meet current obligations|
|Total assets less current liabilities||xxx|
|Creditors: amounts falling due after more than one year|
|Bank loan||xxx||This is the portion of the business’ bank loan which is due to be repaid in over one year’s time|
|Capital and reserves|
|Called up share capital||xxx||These are the funds invested by the owners in the business eg to finance its assets|
|Profit and loss account||xxx||These are the profits made since the start of the business less expenses and amounts paid to the owners as dividends|
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 balance of M/S ABC at the end of the year. Prepare a balance sheet for the same.
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.
Reconciling of balance sheet shall provide many and multiple benefits. However few of the key and main benefits are:
- Eliminates accounting errors
- To better understand and evaluate the financial strength of the company
Manual reconciliation of balance sheet or any accounts is prone to have errors due to the manual intervention involved. Hence it involves a risk of data manipulation, missing the recording of data, etc.
This has been a guide Balance Sheet Reconciliation. Here we discuss how to reconcile the Balance sheet using closing balances, ledger entries and accounting transactions along with practical examples. You can learn more about accounting from the following articles –