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Chartered Management Accountant, Certified Practising Accountant
and Registered Tax Agent
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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
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:
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
The
transactions for the current period are as follows:
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
Balance -600.00 Current Period Transactions
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
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)
(Backed up by Report
on Creditors Ledger that shows the breakdown of the invoices) Current Period Transactions
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)
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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