Balance Sheet Reconciliation (Definition)

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 reconciliationReconciliation Companies 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 Items Assets 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 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 Statements Financial 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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Source: Balance Sheet Reconciliation (wallstreetmojo.com)

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 Sheet A 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 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.
LiabilitiesLiabilities Liability 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 which would likely decrease the revenue for the company. Examples: Debts, accounts payableAccounts Payable Accounts 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 Payable Notes 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 Revenue Deferred 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

Given Below is the Template of the Balance sheet reconciliation.

Company Name
Balance Sheet as at MM/DD/YYYY

Fixed assets
Intangible assetsIntangible Assets Intangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more		xxx	It is the total value of development costs incurred by the business plus the cost of the license it holds for selling its goods.
Tangible assetsTangible Assets Any physical assets owned by a firm that can be quantified with reasonable ease and are used to carry out its business activities are defined as tangible assets. For example, a company's land, as well as any structures erected on it, furniture, machinery, and equipment.read more		xxx	It is the cost of the business premises, furniture
and equipment, less depreciation charged since first using the assets
Investments		xxx	It is the value of shares owned in DEF Utilities PLC

		xxx
Current assets
Stock		xxx	It 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.
Debtors
Trade debtors	xxx		It is the total of the amounts customers owe, less bad debtsBad Debts Bad Debts can be described as unforeseen loss incurred by a business organization on account of non-fulfillment of agreed terms and conditions on account of sale of goods or services or repayment of any loan or other obligation.read more and amounts considered uncollectable
Prepayments and accrued incomeAccrued Income Accrued Income is that part of the income which is earned but hasn't been received yet. This income is shown in the balance sheet as accounts receivables.read more	xxx		It is the maintenance fee payable annually in advance to the computer software company.
		xxx
Cash at bank and in hand		xxx	It is the total of cash kept on site and the balance on the business’ current account with the bank.
		xxx
Creditors: amounts falling due within One Year			Also known as current liabilitiesCurrent Liabilities Current Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc.read more – liabilities are shown as negatives because they are amounts owed by the business.
Bank loans and overdrafts		xxx	It is the portion of the business’ bank loan, which is due to be repaid in the next twelve months.
Trade creditors		xxx	It 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	It 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 incomeDeferred Income Deferred 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		xxx	It includes interest due to the bank loan since the last repayment.
		xxx
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	It is the portion of the business’ bank loan, which is due to be repaid in over one year.

Net assets		xxx

Capital and reserves
Called up share capitalShare Capital Share capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side.read more		xxx	These are the funds invested by the owners in the business, e.g., to finance its assets.
Profit and loss account		xxx	These are the profits made since the start of the business, fewer expenses, and amounts paid to the owners as dividendsTo The Owners As Dividends Dividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.read more.

Shareholders’ funds		xxx

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.

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.

Solution:

Below is the balance sheet reconciliation.

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

Advantages

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

Eliminates accounting errorsAccounting Errors Accounting 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 more
To better understand and evaluate the financial strength of the company

Disadvantages

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.

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Balance Sheet Reconciliation

What is a Balance Sheet Reconciliation?