For businesses, it is vital for balance sheets to be reconciled at the end of a period, usually either a month, quarter or year. This balance sheet reconciliation is part of the closing process. It is important because it helps to identify any errors before closing. Balance sheet reconciliations are one method of making sure account information is accurate and thorough. It will ensure there are no mistakes in information for the purpose of records.
In balance sheet reconciliation, the general ledger trial balance of the account is compared to another source. The other source could be internal (like a subledger) or external (like a bank statement). Differences resulting from transaction timing (like outstanding checks) are labelled as reconciling items.
When an account is reconciled on a balance sheet, several different detail ledgers are utilised. Cash accounts are generally reconciled against bank statements, and accounts payable and accounts receivable are usually reconciled against ageing schedules. Both fixed assets and inventories are reconciled against physical counts.
When starting a balance sheet reconciliation, it is important to note reconciling items under the corresponding balances and then label them. The trial balance should be above the column. The next column should have the balance it will be compared to. When you make sure that the total of the both columns is equal, then the account is completely reconciled.
With balance sheet reconciliations, it is important to make sure to compare the trial balances of both payables and receivables with the respective ageing schedule balances. Once they are equal, you are free to then reconcile the next account. The ageing balances and trial schedules should always be compared initially.
General Ledger Review
In situations where the trial balance is more than the balance of the ageing schedule, it is most likely caused by entries placed directly to the general ledger instead of the subledger. It is important to analyse any of these entries and then relocate them to the subledger. The amount of the difference should help you with your balance sheet reconciliation.