Balance Sheet Reconciliation is the reconciliation of the closing balances of all the accounts of the company that forms part of the company’s balance sheet in order to ensure that the entries passed to derive the closing balances are recorded and classified properly so that balances in the balance sheet are appropriate.
What is a Balance Sheet Reconciliation?
Reconciliation of balance sheet simply 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. 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. 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 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. before the closing of its books at the end of the financial cycle.
Types/Components of Balance Sheet Reconciliation
There are two types of 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 sheetComponents Of The Balance SheetA 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. comprise data, which would either increase or decrease revenue. Hence many of these would have already been computed. In contrast, 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 that would likely increase or generate revenue for the company—examples: cash, receivables, inventory, prepaid expenses, 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. are items which 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., 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. , 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. , 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.
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, 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.
- To better understand and evaluate the financial strength of the company
Manual reconciliation of balance sheets 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.
It 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 –