#035 The importance of reconciling your balance sheet items

In any company, reconciling the balance sheets is one of the steps to take to close the accounts at the end of each financial year.

Indeed, thanks to the accuracy of the balance sheet, the owner of the company and his accountant can have a clear view of the financial situation of the company.

Furthermore, through the accuracy of the balance sheet as well as the basic health of the company, it would be easier for bankers and external advisors to assess the solvency of your company.

Despite the difficulties faced by small business owners and their accountants, it is still important to perform monthly balance sheet reconciliation.

To ensure data accuracy, each balance sheet account must be reconciled for closing each time an accounting period ends. Among the accounts that must be reconciled are, among others, cash, prepaid expenses, accounts receivable, inventory, fixed assets, payroll expenses, suppliers, accrued expenses , loans, etc.

What is a balance sheet reconciliation?

THE Balance sheet reconciliation involves the recording and accounting of all transactions of a company, applying the respective categorization in the process. Assets and liabilities, as well as equity, must be included in the balance sheet. All in all, we “mark” each transaction with account statements or auxiliary documents.

Assets relate to acquisitions such as fixed assets, or things that are owned and no longer need to be paid, such as prepaid expenses, receivables, inventory and cash. As for the liabilities , it concerns the charges to be paid to customers, suppliers, employees, debtors, as well as taxes and others. In some cases, reconciliation may consist of providing a list of transactions corresponding to the balance, ensuring that everything has been correctly classified.

Accounting items to reconcile

Cash reconciliation

Given the time spent identifying the discrepancy, entrepreneurs call on professionals or accountants to ensure the correct entry of what has been compensated by the bank and the content of the accounting software. Moreover, the non-clearance of any transaction by the bank, exceeding 45 days, must be justified.

Reconciliation of prepaid expenses

It is an account in which prepaid expenses (e.g. insurance, property taxes, etc.) are recorded until the corresponding goods and/or services are used. This procedure reconciles the expense with the month corresponding to the income earned.

Reconciliation of accounts receivable

This account is very important because it determines the credit you grant to your customers. You must ensure the accuracy of the information on this account. It is worth checking if there are any invoices that need to be deleted or specifically monitored. Any delay exceeding 90 days relating to the sections on this position must be justified.

If unpaid bills are growing and you're afraid you won't be able to cover them, consider better managing your billing and collections. Check the amount of your unpaid debts daily and mobilize your employees, as well as all the means at your disposal (mail, telephone, email) to ensure recovery in the case of debts exceeding 60 days, presenting a small percentage of your sales.

Inventory Reconciliation

An inventory (action of physically counting your stocks and items in stock) must take place every three months, six months or at worst every year. The accounting balance must correspond to the physical inventory (i.e. the actual inventory). Otherwise, you must adjust the inventory in your accounting software. The reason for any deviation should be justified. Reconciling inventory helps identify abuse, fraud or theft.

Reconciliation of fixed assets

For small and medium-sized businesses, it is appropriate to do a quarterly or annual reconciliation. As for large companies with a lot of fixed assets, it is advisable to do this monthly.

The aim is to check if the company still has the computers, cars, machines, etc., and to identify the gap if there is any and plan the amount necessary for replacements or additional taxes.

Apart from the control and balance sheet of fixed assets, a systematic reconciliation of fixed assets allows the company to mention the related depreciation charge in the income statement.

Reconciliation of salary debts

It is important to properly reconcile your tax debts relating to salaries, i.e. the deductions at source due to the various levels of government.

In addition to tax debts, we must not forget to ensure that payroll is correctly calculated. Also, it is necessary to ensure that taxes on salaries, leave, bonuses and commissions, as well as retirement accounts, are correctly calculated.

Reconciliation of accounts payable

This account includes most of the company's current liabilities and it tracks what the company owes to its suppliers of goods and/or services. In general, it is updated weekly, because most companies pay their suppliers weekly. Any payment not made beyond 60 days must be justified.

Reconciliation of accrued liabilities

In addition to expense accounts payable, it includes the balance due for goods and services used but not yet received, billed, or paid. To calculate the adjustment for this account, compare our current purchase orders, our unreceived purchases, inventory in transit, etc.

Loan reconciliation

This involves the reconciliation of amounts owed to banks (accrued interest, capital owed), individuals or other creditors, which should be carried out systematically. Without loan reconciliation, we do not have a good picture of the financial situation.

Good to know

Here are some definitions to know.

Inventory

Detailed descriptive statement of a company's stocks on a specific date, obtained following a count or by accounting for all movements of  stock. http://www.granddictionnaire.com/ficheOqlf.aspx?Id_Fiche=2069709

Stocks

Assets that an entity holds at a given time for sale or for use in manufacturing a product or providing a service. http://www.granddictionnaire.com/ficheOqlf.aspx?Id_Fiche=2069709

To conclude, monthly balance sheet reconciliations to understand and evaluate the financial state of a business. It is therefore very important to regularly carry out reconciliations on all balance sheet accounts to be up to date and to have a good image of our company.