Best practices, examples, and tools for mastering balance sheet account reconciliation

CFOs and finance teams often look at the balance sheet and the income statement to determine profitability and forecast future performance. However, discrepancies in financial statements can skew the entire picture, creating relatively minor questions that are easy to resolve to major compliance challenges. 

This is where balance sheet reconciliation comes into play. An accurate and reconciled balance sheet provides a clear and transparent understanding of the company's financial health and performance, enabling CFOs and other stakeholders to make informed, data-driven decisions. Without this snapshot, companies run the risk of making incorrect or misinformed decisions, impacting the accuracy of business performance forecasts and financial stability.  

This article will help you learn everything you need to know about balance sheet reconciliation, including how it is done, the challenges involved, and best practices that can help you avoid them. 

What is balance sheet account reconciliation?

Balance sheet account reconciliation is an essential step in ensuring the accuracy and reliability of your financial records. It involves verifying assets, liabilities, and shareholders' equity by cross-referencing transaction records with supporting documents to ensure that every transaction is properly recorded in the correct categories based on the company’s chart of accounts. 

The balance sheet is a key component of the three-statement model, which also includes a cash flow forecast and an income statement. Together, these three financial statements comprehensively depict a SaaS company's financial performance, stability, and future financial potential.

Key components of balance sheet reconciliation

Your balance sheet has three major components — assets, liabilities and or owners’ equity. 

Assets appear on one side of the balance sheet equation and liabilities plus owners’ equity appear on the other. As the name suggests, the two sides of the equation must balance out (i.e. they need to be equal to each other). If not, you need to investigate where the discrepancy lies.   

Assets include anything that can create cash inflow (in the future) is an asset while anything that can create cash outflow (in the future) is liability. Shareholder or owners’ equity is the  amount of money that belongs to the owners of the business or its shareholders. The table below provides a summary of the different line items that are included in these different categories. 

When you do a balance sheet accounts reconciliation, you compare and verify the individual line items for each account in these three categories with different source documents. The source documents can be both internal (records generated by the company) and external (records received from a third party). These typically include financial records like bank statements, subsidiary ledgers, and payment schedules. 

How often should you reconcile your balance sheet? 

While financial transactions are recorded in the general ledger throughout the year, the balance sheet provides a snapshot of the business’ financial position at a moment in time. Regular account reconciliation ensures your balance sheet is up-to-date and accurate when you’re ready to take that picture.  

The frequency at which businesses need to do their balance sheet reconciliations can vary based on individual requirements or account type. While most private companies perform monthly reconciliations that coincide with month-end closes, others might choose to reconcile their balance sheets quarterly and annually. Additionally, if you’re a public company, you will have to do reconciliations and a three-way match (involving the invoice, bill of sale, and transaction).

Here are some general guidelines for different types of account reconciliations:

• Cash and bank balances: Reconcile every time you receive a bank statement to catch any discrepancies early.
• Accounts receivable and payable: Follow a cycle aligned with payment terms or opt for biweekly reconciliation for efficiency. 
• Advance payments and accrued liabilities: Reconcile these along with the payment schedule to keep records current.
• Other categories: For intercompany transactions, asset transactions, and investments, aim for reconciliation every three months.

How to do a balance sheet reconciliation in six steps

The balance sheet reconciliation process is often time-consuming. Following this six-step process will help ensure your balance sheet account reconciliation is accurate:  

Step 1: Determine accounts that require reconciliation

Identify all the accounts that need to be reconciled, including cash accounts, accounts receivable, accounts payable, inventory accounts, and other balance sheet accounts. Depending on your industry and organization, you might only need to reconcile some accounts as part of this process. 

Step 2: Gather and consolidate the required account details

If you’re using a different financial software tools, consolidating this information from disparate data sources becomes much more manageable through integrations between them. Otherwise, you'll have to pull together your general ledger and all your other supporting documents, such as bank statements, invoices, or payment records, manually in order to consolidate them. 

Step 3: Compare reconcile each account

The next step is to verify the information in the general ledger with the supporting documents for each account to identify any discrepancies or accounting errors. For example, you would compare your bank statement with all the banking entries in the general ledger to verify whether the cash balance is accurate. 

Step 4: Address any discrepancies

If you identify any discrepancies, you’ll need to correct them. To do this, you’ll have to carefully review transaction records and possibly contact vendors or customers for information on specific transactions. You may also have to examine internal processes to figure out if something needs to change to avoid such discrepancies in the future. 

Step 5: Adjust the general ledger

The next step is to adjust the general ledger and relevant journal entries based on your findings. You might need to add, remove, or reclassify transactions, correct errors, or update balances. 

Step 6: Complete the reconciliation and document your findings 

As the last step, ensure that the ending balance on the general ledger matches the supporting documents, and resolve any discrepancies. Also, document the findings and results, by creating a report or summary, so that controllers, auditors, and other professionals can track the changes. This will also aid future reconciliations by identifying and documenting recurring issues.

Example: Balance sheet reconciliation for cash accounts in a SaaS business

For cash accounts, the source documents for reconciliation will generally be bank statements, cash receipts, and cash disbursement records. Let’s use the six-step process described above to see how to reconcile cash accounts. 

• Step 1: Obtain the general ledger for the cash account being reconciled.
• Step 2: Obtain bank statements for the account in question.
• Step 3: Compare transactions between the general ledger and the bank statement.
• Step 4: Document any disparities between the two records.
• Step 5: Investigate the variances.
• Step 6: Rectify discrepancies in the general ledger account, if needed.

You can follow the same process with other accounts, matching them with their respective source documents for reconciliation. Here are some other examples of accounts and the source documents you might need for your balance sheet reconciliation. 

Common challenges in account reconciliation

Similar to other financial processes, balance sheet account reconciliation can be very  time-consuming. Here are some of the challenges you might encounter during your  reconciliation process. 

Disparate data sources and discrepancies between them 

The biggest challenge in the reconciliation process is consolidating all the information you need. Data is frequently spread across various sources, tools, and spreadsheets, making comparing general ledger items with the source documentation difficult.

The other challenge here is to identify and resolve any discrepancies occurring due to time differences and data-entry errors. If you have to go back into transactions for specific dates, finding the source documents and then sifting through them to locate the errors can feel like searching for a needle in a haystack.  

Manual reconciliation processes

Manual processes lead to more opportunities for discrepancies and inaccuracies in your data because they often do not provide sufficient controls. This makes it difficult to monitor the progress of the reconciliation process, pinpoint problems, or ensure timely corrections. 

In addition, identifying, verifying and addressing thousands of reconciliations, manually, is a significant bottleneck in the financial close process. This, in turn, causes delays for CFOs and finance teams who need the data to do their financial planning and analysis. Having to wait longer to get all the financial data needed for forecasting and planning creates a potentially significant opportunity cost for SaaS businesses. Insights gained from these processes provides SaaS businesses greater agility in decision making, allowing them to leverage emerging opportunities in the market and correct course quickly if needed. 

Fast close inaccuracies

While everyone appreciates a speedy close, rushing through the reconciliation process may result in overlooking significant errors and impacting the quality of insights. 

Ultimately, the balance sheet has to balance. If you don’t give the reconciliation process the time and attention it requires, when you do your next balance sheet reconciliation, you’ll end up back at square one. Retracing your steps to find out where the error (or errors) occurred makes the reconciliation even harder because as time goes on, there are more transactions to reconcile. 

Accuracy and compliance in financial close

Ensuring that the adjustments made in the reconciliation process are accurate and comply with accounting standards can be yet another challenge. 

In the words of Benjamin Franklin, “An ounce of prevention is worth a pound of cure.” In the case of balance sheet account reconciliation, the best prevention comes with technology and automation. 

Streamlining the reconciliation process through automation

A smooth reconciliation process allows for an accurate and timely financial close, which paves the way for financial forecasting to support strategic decision-making.

Fortunately, there are tools on the market today that can automate many aspects of the financial close. Some offer auto reconciliation, which can save companies a great deal of time – often days – without compromising the integrity of the data.

Such tools match transactions and balances automatically and identify and report any discrepancies. They eliminate costly, tedious, and error-prone processes and allow teams to focus on value-added activities like long-range planning, growth, and building effective processes. 

Five best practices for balance sheet account reconciliation

Following best practices in any financial process improves efficiency while maintaining accuracy and control. For balance sheet reconciliation, consider the below best practices.

1. Use technology to automate processes

Automation enhances reconciliation by streamlining data integration, flagging discrepancies, and optimizing workflows. Financial tools centralize data collection and management, ensuring efficiency and accuracy throughout the financial close.

2. Establish a risk-based account reconciliation process

Categorize accounts as low or high risk based on factors like balance variances and previous reconciliation failures. For instance, the reconciliation of big-ticket items needs to be supported with good documentation and checked more often. This way, you can prioritize your efforts and focus more on high-risk accounts to enhance the accuracy of your financial reports over time. 

3. Internal controls

Clear policies, procedures, and robust internal controls are paramount for balance sheet reconciliation. A sound internal control system verifies that transactions and activities are for the correct purpose and amount. Not only do they help maintain operational efficiency by identifying problems and correcting lapses, but they also prevent any possibilities of fraud. 

4. Create a checklist for balance sheet certification

When you’re reconciling accounts, it's easy to get lost in a sea of transactions. A checklist can be useful to help guide you through the process, helping to stay on track as you work your way through all the tasks involved. 

5. Make continuous improvements to workflows

Regularly reviewing and updating your reconciliation procedures can help you identify bottlenecks and inefficiencies early on. Continuously evaluate your processes and make improvements as required.

How tech-enabled balance sheet account reconciliation enhances financial forecasting

Balance sheet account reconciliations form the foundation of sound financial reporting and accurate forecasting. 

Comparing accounts, spotting discrepancies, and addressing inaccuracies all become easier and faster when you can access all your data from one location. With more than 200 integrations, Drivetrain easily consolidates all your financial data from different regions, teams, product lines, sources, etc., into one platform for easy visibility and even lets you slice and dice your data to uncover more and better insights. 

With built-in version control combined with in-app communication features, Drivetrain also makes it easier to drill into your data and work with other teams to more quickly find the sources of error in your financial reporting.  

Check out Drivetrain today to learn and how it can help you build data integrity and visibility, ensuring that the financial data you use for budgeting, forecasting, and strategic planning is trustworthy and reliable.