Balance Sheet ReconciliationExplained & Defined

Written By:
Adiste Mae

What is a Balance Sheet Reconciliation?

Completing a detailed Balance Sheet Reconciliation is an important step during a company’s financial close.

It helps verify the accuracy of financial data as represented in the books of the company for a specific accounting period.

The process of validation during a Balance Sheet Reconciliation entails checking and comparing general ledger accounts against documents and receipts.

Through this process, the accuracy of the transactions entered, and therefore the posting against the correct reports are verified.

The accounts that are to be reconciled by the Accountant during a Balance Sheet Reconciliation are the following:

• Accounts Payable
• Accounts Receivable
• Payroll
• Fixed Assets
• Debit and Credit Transactions
• Overdue Accounts
• Other Items in the General Ledger

Challenges of the Financial Close

The efforts done in completing a Balance Sheet Reconciliation during financial close can be a real challenge when all the validating and verifying are done manually, especially for large companies with thousands of transactions being entered daily.

Financial close activities do not just include balance sheet reconciliation – it also involves the completion of journal entries, rectifying unmatched transactions, and completing checklists.

If all of these activities are done manually, they simply are not sustainable for the company.

Should a company use software but uses an outdated version, the work will also become repetitive and more labor-intensive.

How to Do Balance Sheet Account Reconciliation with Accounting Technology

Over the course of the past year, the pandemic forced accounting and finance teams to figure out how to work virtually.

Through modern accounting technology, the way people work has changed and the balance sheet reconciliation process has become more automated, integrated, and continuous.

The integration of technology into a company’s financial close has made the closing process more efficient and in turn, allowed businesses to gain better internal control, a centralized and automated trial balance processes, reconciliation consistencies, a more proactive task alerts, and reporting that is centered on roles instead of processes.

The Importance of Balance Sheet Reconciliations

Financial reports make the most sense when they are reported in a timely manner and if it is reported accurately.

This makes the balance sheet reconciliation a critical component of a company’s financial close.

How Modern Accounting Technology Simplifies & Streamlines the Process

Modern accounting technology automates the business processes, thereby reducing the time spent on repetitive and manual tasks.

Through automation, businesses can focus on value-adding activities.

It also provides unification of the business processes that leads to the standardization of processes resulting in a system that is more efficient and consistent and businesses having more internal control.

Finally, the use of modern accounting technology makes it possible for businesses to provide real-time reporting that will benefit the management and other stakeholders of the company.

The Costs of Manual Account Reconciliation

There are advantages as well as disadvantages when firms prefer manual account reconciliation but more importantly, there are costs attached when the option of manually reconciling is chosen over automation. They are the following:

Time

All the activities related to a financial close will take a lot of time verifying, checking, balancing, and correcting – a valuable time that can be used to dedicate to value-adding activities.

At the same time, planning and forecasting will be difficult when a manual account reconciliation is used.

Cost

There is a cost attached when businesses automate their processes such as the purchase of an ERP software.

However, still manually working on reconciliations will mean a company has to have a bigger accounting and finance department and that still translates to cost.

Risk

Human error cannot be avoided when reconciliations are done manually.

Hence, the risk of the reports not being corrected accurately is a risk that must be minimized at all costs.

Audit & Compliance

The reason why companies reconcile and perform other critical accounting activities is to adhere to regulatory compliances and requests from auditors.

But when reconciliations are done manually, there is a lack of visibility and could end up costing the company more time and money.

Talent

Accountants of companies who spend more time on reconciliation rather than focusing on value-added activities will become disengaged and less productive as compared to those who work for companies with automated processes.