Critical Control: Reconcile Balance Sheet Accounts Before Closing
In this article, I explain why you need to reconcile balance sheet accounts before closing your books.
Reconcile Balance Sheet Accounts
What is the most important accounting procedure?
Reconciling all significant balance sheet accounts at period-end.
If you’re closing your books for a period or getting ready for an audit, you need to reconcile each balance sheet account.
Many asset and liability accounts are not reconciled monthly. The result? Errors often occur.
Mystery Accounts
I’m thinking of accounts such as suspense, other assets, and miscellaneous liabilities. What are these? They are places where bookkeepers often put questionable entries. They don’t know where a debit or credit goes, so they temporarily place entries in these accounts (and forget they have done so). However, if these accounts are not corrected, significant errors can occur.
Customer and Payable Accounts
Bookkeepers normally reconcile accounts such as accounts receivable and accounts payable. Receivables are reconciled to individual customer accounts, and payables are reconciled to individual vendor amounts. But if such reconciliations aren’t performed every month, perform this procedure before closing your records.
Bank Accounts
Bank accounts are also normally reconciled on a timely basis. If not, these need to be reconciled (these reconciliations are often the most important).
Investment and Debt Accounts
Tie your investment accounts back to investment statements and debt accounts to your loan amortizations.
Plant, Property, and Equipment
Reconcile your general ledger PP&E accounts to your depreciation schedule. It’s easy to post PP&E purchases in the general ledger but forget to update your depreciation schedule.
Inventory
Perform all period-end counts of inventory and reconcile the details (counted items with item prices extended to totals) to your general ledger accounts.
Other Liabilities
I commonly see errors in payroll liability accounts. Accounts such as insurance withholding payable can be challenging to track. If such accounts are reconciled infrequently, you’ll probably have difficulty correcting the mistakes that accumulate.
Equity Accounts
Most businesses and nonprofits have just one or two equity accounts. Most of the time, the profit and loss is automatically posted to retained earnings or net assets (for nonprofits) by the software, and this is often the only activity in the equity accounts.
Bookkeepers should generally avoid posting entries to these accounts. Sometimes entries are made to an equity account because the bookkeeper can’t find anywhere else to post the entry–not appropriate thinking, but it happens.
If you are correcting a prior period error, you may need to post a journal entry to an equity account.
Income Statement Accounts
Once balance sheet accounts are all reconciled, it’s a good practice to compare your revenue and expense accounts to budget or prior periods to see if amounts were classified appropriately in the income statement.
Reconciling Balance Sheet Accounts
Reconciling all balance sheet accounts before closing your books is (in my opinion) the most important accounting procedure businesses perform.
I hope this helps you with your bookkeeping.
Or, if you’re an auditor, consider how this control is key to your client’s success in creating accurate records. If your audit client is not reconciling balance sheet accounts, consider recommending that they do so in your management letter or as an internal control weakness.
The following video is an overview of the above article:
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