Balance sheet reconciliation: What it is and how to do it
The process of balance sheet reconciliation often reveals whether your books truly reflect what's happening with your money. That's where closing your books comes in — it's like taking a financial snapshot to make sure everything lines up. One of the most important parts of this process is balance sheet reconciliation. We get that the term"balance sheet reconciliation" might make your eyes glaze over, so we’re here to help you understand why it matters and how to do it.
What is balance sheet reconciliation and why is it important
Reconciliation just means fact-checking your financial statements against reality. When we reconcile a balance sheet, we're comparing what your books say you have — like cash, inventory, and equipment — with what you actually have, based on bank statements, physical counts, and other documentation.
We recommend reconciling your balance sheet accounts monthly. This helps catch discrepancies early and keeps small issues from becoming big problems. Some accounts, like your bank accounts, should be reconciled even more frequently — we suggest weekly or bi-weekly for those.
How to reconcile your balance sheet
The basic process of reconciliation follows a straightforward pattern.
Start by gathering all your documentation — bank statements, credit card statements, loan statements, and any other relevant records. You'll need these to verify your account balances.
Next, compare the ending balance in your books with the balance shown on your documentation. They should match, but they often don't at first glance. That's normal because of timing differences and items you might have missed recording.
When you find differences, create a reconciliation worksheet. List all the items that appear in one place but not the other. This helps track down what's causing the discrepancy and ensures you don't miss anything in your investigation.
Let's walk through reconciling your bank account — it's usually the best place to start. Here's how we do it:
First, grab your bank statement and your accounting records for the same period. Let's say your bank statement shows $10,000, but your books show $9,750. Don't panic — this is normal. Start by marking off all the transactions that appear in both places.
Next, look for items that explain the difference:
Checks you've written that haven't cleared yet
Deposits that are in transit
Bank fees that haven't been recorded
Automatic payments you forgot to enter
Make a list of these items and their amounts. If they explain the $250 difference, great! If not, you'll need to dig deeper to find what's missing.
You'll know you're fully reconciled when you can explain every difference between your books and your documentation. For bank accounts, your book balance plus or minus all those outstanding items should equal your bank statement balance exactly — down to the penny. Once everything matches, make any necessary adjustments in your books, save your reconciliation report, and file your supporting documentation. Think of this final step as drawing a line in the sand — you now have a verified starting point for next month's reconciliation.
Challenges with balance sheet reconciliation
Even experienced bookkeepers run into roadblocks during reconciliation.
Missing documentation is probably the biggest headache — those mystery charges that no one remembers authorizing or receipts that vanished into thin air. Another tricky area is timing differences, especially when transactions happen right at the end of the month.
Then there's the challenge of multiple users making entries in your accounting system. Without clear procedures, it's easy for transactions to be entered twice or coded incorrectly.
The good news is that most of these challenges can be prevented with good systems in place. Set up a digital filing system for all receipts and important documents — snap photos of paper receipts right away before they get lost. Create a clear process for recording transactions and stick to it. We recommend setting aside a specific time each week to enter all transactions and file documentation. For businesses with multiple users in their accounting system, establish clear procedures about who enters what and when. A simple checklist can prevent a lot of headaches down the road.
When to call in an expert
While many small business owners handle their own balance sheet reconciliations, there are times when it makes sense to bring in help. Consider reaching out to a professional if:
You're spending hours trying to track down discrepancies. Your time is valuable, and if reconciliation is taking up too much of it, that's a sign you might need support.
Your business financials are growing more complex. Maybe you've added new payment methods, expanded to multiple bank accounts, or started dealing with foreign currency. These all add layers of difficulty to reconciliation.
You're noticing frequent unexplained differences. If things aren't adding up month after month, it's time to have an expert take a look. Small discrepancies can point to bigger issues that need addressing.
Remember, reconciliation isn't just about matching numbers — it's about understanding your business's financial health and protecting against errors or fraud. If you're feeling overwhelmed or unsure about your reconciliation process, we're happy to take a look and help you develop a system that works for your business.
Want to learn more? Learn how we can help your small business with accounting, including managing your books with confidence.