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The process of balance sheet reconciliation involves four steps. The steps include: balance the account according to the bank, balance the account according to the books, compare the bank balance and the book balance, and create journal entries to make necessary adjustments. These steps are normally performed by accounts and/or business professionals.
Balance sheet reconciliation is necessary to make sure that bank statements and actual cash match up with the money that has been spent, disbursed, or otherwise transferred by the company throughout the course of a specific period of time, usually a month. On the surface it is a complex process, but once the mechanisms are understood, reconciling a balance sheet is simple. In fact, the process is similar to the manner in which an individual balances his or her checkbook at the end of each month.
The first step to balance sheet reconciliation is the balancing of the account according to the bank. This means that the individual performing the reconciliation must obtain a copy of the bank statement for the month in question. He must then make sure all deposits and debits made through the bank equal what the bank statement lists as of the close of business on the day that the statement was printed.
Part of this first step involves comparing any checks that have been drawn and cashed to the amounts the bank cashed. The individual who is reconciling the information should also account for any checks that have not yet been cashed or that have otherwise failed to appear on the balance sheet. Once he has done this, the second step of the process of balance sheet reconciliation can begin.
The second step of the balance sheet reconciliation process is to balance the account according to the books. Here, the individual will take the checks that were written and deposits that were made according to the financial records that are on file, and attempt to reconcile them to make sure the final amount on record according to the company’s financial documents equals what it should. To determine if this number is right, the number on record will be compared to the final amount that was on record at the beginning of the month after the addition of any deposits and the subtraction of any debits or checks that were drawn from the account through the end of the month.
Once the bank’s final amount and the company’s final amount are calculated, the third step is to compare the two to make sure the balances are the same. This involves ensuring that the bank and the company’s financial records are both correct and show the same amount of deposits, withdrawals, and other activity. Finally, in the fourth step, the individual reconciling the account can make any entries in the journal regarding why there were differences or what else was discovered as discrepancies for that period of time.