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Understanding Your Balance Sheet - 5. Balance Sheet Reconciliations

Posted on 29 September, 2014 at 1:14
This is the 5 in a series of posts that have the aim of helping you, the business owner, to better understand your Balance Sheet so that you can use it to work for your business.

So far we have looked at all the categories of accounts that make up a Balance Sheet. We have also looked at Control Accounts, those accounts that are “controlled” by, or are the “summary” of, other ledgers. Now we will look at Balance Sheet Reconciliations. This is one of the major steps towards using the Balance Sheet to work for your business.

Balance Sheet Reconciliations

One thing that has never failed to amaze me through my career is how many companies, and we are talking large organisations here, fail to stay on top of their Balance Sheet reconciliations. I have regularly found that either the reconciliations have not been done at all, or that they have not been done properly. At times, when starting a new job in a large organisation, it has taken me several months (in between all my other duties) to get the balance sheet reconciliations up to date. The annoying thing about this is that as long as reconciliations are up to date and are done correctly, it is a relatively quick and easy task to keep them up to date.

What a Balance Sheet Reconciliation Should Show

Unlike other sorts of reconciliations, i.e. bank reconciliations, where you are reconciling one source of figures to another, a Balance Sheet Reconciliation should show the exact detail of how the balance of an account on the Balance Sheet is made up. In other words, it should show all the transactions that, added together, total the balance of that particular Balance Sheet account.

A Common Mistake With Balance Sheet Reconciliations

I mentioned earlier that I have often found that Balance Sheet Reconciliations have not been done properly. This is because of one common mistake that I have found all too many people make, even qualified accountants who should know better.

The mistake is in using “Brought Forward” and “Carried Forward” balances in doing the reconciliations. “Brought Forward” and/or “Carried Forward” balances should never be used in Balance Sheet Reconciliations and I will show you why:

Accruals Account
Balance B/Fwd                                           -600.00
Reversal of Accrual – Phones                       100.00
Reversal of Accruals – Electricity                   200.00
Accountant Invoice                                       150.00
Accrual – Phones                                        -150.00                                       
Accrual – Electricity                                     -250.00                                      
Balance C/Fwd                                            -550.00

Now, if, using the above example of how NOT to do a Balance Sheet Reconciliation, you were asked exactly what transactions made up the balance of -500.00, you would not be able to answer. In order to provide an answer you would have to calculate back through previous ‘reconciliations’ until you managed to figure it out.

Effectively what you have here is not a Balance Sheet Reconciliation at all. Rather, what you have is merely a detailed analysis of the movements of that particular account for a given period. (Or a snapshot of the Trial Balance).

How To Do a Balance Sheet Reconciliation

When doing a Balance Sheet Reconciliation, and these should be done each and every period (be it month, quarter or year), you will need the reconciliation from the previous period and details of all the transactions that have occurred in the current period:

  1. See if any of the transactions in the previous reconciliation can be offset against any of the current period transactions (i.e. reversing accruals, invoices or payments against accruals etc.). These can be in full or just partial (e.g. any prepayments would likely be partial offsets).
  2. Match off all relevant transactions.
  3. List all remaining transactions to form the new reconciliation.

That is it in a nutshell. You may however find that with certain accounts you use spreadsheets to help show the movements. Or you may find that with large transactional accounts, such as the Control Accounts talked about in the previous post, you will just put a total that can in turn be backed up by another report – i.e. GST on Current Period Sales.

Example of Doing a Balance Sheet Reconciliation

Using the same example as used above, the previous reconciliation of the Accrual Account now looks like this:

Accruals Account
Accrual of Accountant Invoice                            -250.00
Accrual of Phones                                            -100.00
Accrual of Electricity                                         -200.00
Accrual of Legal Fee                                        -   50.00
Balance                                                           -600.00

The transactions for the current period are as follows:

Reversal of Accrual – Phones                           100.00
Reversal of Accruals – Electricity                      200.00
Accountant Invoice                                          150.00
Accrual – Phones                                           -150.00
Accrual – Electricity                                        -250.00

So, as stated above, the first thing that needs to be done if the offsets, matching off those transactions that can be (including the partial):

Accruals Account

Accrual of Accountant Invoice                    -250.00 ¢ -100.00
Accrual of Phones                                    -100.00 ¢                                     
Accrual of Electricity                                 -200.00 ¢
Accrual of Legal Fee                                 -  50.00
                                        Balance                                                   -600.00

Current Period Transactions

Reversal of Accrual – Phones                        100.00 ¢     
Reversal of Accruals – Electricity                   200.00 ¢
Accountant Invoice                                       150.00 ¢
Accrual – Phones                                        -150.00
Accrual – Electricity                                     -250.00

The next thing to do is to create the current period reconciliation, working down the remaining transactions in order:

Accruals Account

                                        Accrual balance of Accountant Invoice            -100.00
                                        Accrual of Legal Fee                                     -  50.00
Accrual – Phones                                         -150.00
Accrual – Electricity                                      -250.00
                                        Balance                                                        -550.00

As you can see from the current period reconciliation, you can now tell exactly how the balance of -550.00 is made up without having to look back through previous reconciliations.

It doesn’t matter how many transactions there are in an account, if you follow the basic principle shown above then your Balance Sheet Reconciliations will be correct.

Example Using a Control Account

GST Inputs Account (Previous Period Reconciliation)

GST on Purchase Invoices Prior Period   5000.00 ¢
Balance                                                5000.00

(Backed up by Report on Creditors Ledger that shows the breakdown of the invoices)

Current Period Transactions

GST Refund from Tax Office                     -5000.00
                                        GST on Current Purchase Invoices            6000.00

(Again, backed up by Report on Creditors Ledger that shows the breakdown of the invoices)

GST Inputs Account (Current Reconciliation)

GST on Current Purchase Invoices            6000.00
Balance                                                  6000.00

Generally when using either a report or a spreadsheet to back up any of the figures in a Balance Sheet Reconciliation you would attach a copy to the reconciliation.

Well, I hope that has given you an understanding of how reconciliations should be done.

Next Week – Using Reconciliations to check on transactions.

Categories: Balance Sheet

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