Balance Sheet Reconciliation Checklist: 4 Things to Check
When you’re DIY-ing your bookkeeping and finances, your to-do list is already a mile long, but I promise that balance sheet reconciliation should be pretty high up there!
Balance sheet reconciliation is when you compare the information on your balance sheet with the sources (such as bank statements, ledgers, third-party accounts, etc). The goal is to double-check that what your balance sheet says is an accurate representation of your business’s financial position.
And, if you’re wondering where to start, here are the main things to look for, why they matter, and the essentials of any account reconciliation:
What to Look For When Reconciling Your Balance Sheet
Your balance sheet should be part of your month-end reconciliation process (if you’re outsourcing your bookkeeping monthly, they do this for you). With reconciliation, you’re aiming to prevent errors, fraud, and incorrect reporting before it becomes a problem.
It’s just one of the many (if not one of the most important) ways of keeping your bookkeeping accurate and up-to-date.
When you’re reconciling your balance sheet, here are some things you should consider:
#1. Know the Difference Between Assets, Liabilities, and Equity
Your balance sheet is a continuous running balance at any point in time during the life of your business. It doesn’t resent at the beginning of the year like a Profit and Loss statement does.
This is why it’s even more important to understand the difference between assets (resources owned by the company that have economic value and are expected to provide future benefits), liabilities (debts and obligations the company owes to external parties), and equity (the residual interest in the company’s assets after deducting liabilities, representing the owners’ claim on the business).
#2. Reconcile Your Accounts, Too
Don’t start with your balance sheet—start with your business bank accounts and credit accounts to ensure there are no uncleared transactions. This will ensure the ending balances of the accounts, providing the information to your balance sheet, are accurate!
If there are uncleared transactions for any closed periods (transactions from previous months or years), this means your financial reports are not accurate—and your balance sheet likely isn’t, either.
#3. Don’t Avoid Your Liability Section
The liability section of your balance sheet deals with loans and lines of credit or credit cards. These should also be reconciled monthly.
Pro tip: When you’re recording payments to lines of credit, you need to split out the interest expense from the principal. Interest expense belongs on the balance sheet, while the principal should reduce the loan balance. If you skip this step, your loan balance will go negative, which is incorrect!
#4. The Equity Section
The equity section tracks your equity in the business over time. Depending on how a business is set up for tax purposes will determine how the equity accounts are set up!
How to Keep Your Books Up to Date and Accurate in Your Business
Whether you’re a coach or a creative service provider, you have to keep your books up to date and accurate for not only tax planning, but to understand the financial side of your business. Just as you would track the success of a marketing campaign, you should be tracking the financial performance of your offers, campaigns, etc., over the year.
Also, the IRS can audit your business up to 3 years (and in some cases, 6 years) after the tax return date—and accurate bookkeeping goes a long, long way during an audit.
Ready to hand off your bookkeeping and take one more thing off your plate? Book a free call and see if we’re a good fit for your business!
