This is the 5 in a series of posts that have the aim of helping you, the business owner, to better understand your Balance Sheet so that you can use it to work for your business.
So far we have looked at all the categories of accounts that make up a Balance Sheet. We have also looked at Control Accounts, those accounts that are “controlled” by, or are the “summary” of, other ledgers. Now we will look at Balance Sheet Reconciliations. This is one of the major steps towards using the Balance Sheet to work for your business.
Balance Sheet Reconciliations
One thing that has never failed to amaze me through my career is how many companies, and we are talking large organisations here, fail to stay on top of their Balance Sheet reconciliations. I have regularly found that either the reconciliations have not been done at all, or that they have not been done properly. At times, when starting a new job in a large organisation, it has taken me several months (in between all my other duties) to get the balance sheet reconciliations up to date. The annoying thing about this is that as long as reconciliations are up to date and are done correctly, it is a relatively quick and easy task to keep them up to date.
What a Balance Sheet Reconciliation Should Show
Unlike other sorts of reconciliations, i.e. bank reconciliations, where you are reconciling one source of figures to another, a Balance Sheet Reconciliation should show the exact detail of how the balance of an account on the Balance Sheet is made up. In other words, it should show all the transactions that, added together, total the balance of that particular Balance Sheet account.
A Common Mistake With Balance Sheet Reconciliations
I mentioned earlier that I have often found that Balance Sheet Reconciliations have not been done properly. This is because of one common mistake that I have found all too many people make, even qualified accountants who should know better.
The mistake is in using “Brought Forward” and “Carried Forward” balances in doing the reconciliations. “Brought Forward” and/or “Carried Forward” balances should never be used in Balance Sheet Reconciliations and I will show you why:
Now, if, using the above example of how NOT to do a Balance Sheet Reconciliation, you were asked exactly what transactions made up the balance of -500.00, you would not be able to answer. In order to provide an answer you would have to calculate back through previous ‘reconciliations’ until you managed to figure it out.
Effectively what you have here is not a Balance Sheet Reconciliation at all. Rather, what you have is merely a detailed analysis of the movements of that particular account for a given period. (Or a snapshot of the Trial Balance).
How To Do a Balance Sheet Reconciliation
When doing a Balance Sheet Reconciliation, and these should be done each and every period (be it month, quarter or year), you will need the reconciliation from the previous period and details of all the transactions that have occurred in the current period:
That is it in a nutshell. You may however find that with certain accounts you use spreadsheets to help show the movements. Or you may find that with large transactional accounts, such as the Control Accounts talked about in the previous post, you will just put a total that can in turn be backed up by another report – i.e. GST on Current Period Sales.
Example of Doing a Balance Sheet Reconciliation
Using the same example as used above, the previous reconciliation of the Accrual Account now looks like this:
The transactions for the current period are as follows:
So, as stated above, the first thing that needs to be done if the offsets, matching off those transactions that can be (including the partial):
Current Period Transactions
The next thing to do is to create the current period reconciliation, working down the remaining transactions in order:
Accrual balance of Accountant Invoice -100.00
Accrual of Legal Fee - 50.00
As you can see from the current period reconciliation, you can now tell exactly how the balance of -550.00 is made up without having to look back through previous reconciliations.
It doesn’t matter how many transactions there are in an account, if you follow the basic principle shown above then your Balance Sheet Reconciliations will be correct.
Example Using a Control Account
GST Inputs Account (Previous Period Reconciliation)
(Backed up by Report on Creditors Ledger that shows the breakdown of the invoices)
Current Period Transactions
GST on Current Purchase Invoices 6000.00
(Again, backed up by Report on Creditors Ledger that shows the breakdown of the invoices)
GST Inputs Account (Current Reconciliation)
Generally when using either a report or a spreadsheet to back up any of the figures in a Balance Sheet Reconciliation you would attach a copy to the reconciliation.
Well, I hope that has given you an understanding of how reconciliations should be done.
Next Week – Using Reconciliations to check on transactions.