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5 Common Balance Sheet Reconciliation Pitfalls

Picture this: you're on a sunny beach, somewhere in the Maldives. G&T in your left hand, and a plate of seasonal fruit on a table within reach of your right. The weather is hot, the water is cool. You don't have anywhere you need to be.

It has been anecdotally proven that reconciling your ledger feels the exact opposite of that. I've written an article to help bring it back just one small peg.

I can't guarantee after reading this article that reconciling your trial balance will feel like you're on a tropical beach, in fact I can categorically promise you the opposite - but maybe we can take you from the feeling of walking through a sketchy neighbourhood all the way up to eating at a restaurant that has 3.5 stars on Google. Not perfect, but the service was adequate and I didn't get food poisoning.

Without further ado, here's our top 5 Balance Sheet Reconciliation Pitfalls and how we can remedy them:

5. Inaccurate Accounts

Issue: When reconciling, it's imperative that all accounts are listed. You'll be amazed at how many companies just reconcile the same accounts over and over again, while failing to check whether a new account is added.

Remedy: Make sure there is a check in your spreadsheet back to each category within the trial balance and ensure nothing has slipped past.

Issue: Your balance may include unnecessary accounts, and the best method may be to hide them. Be careful when doing this though, you may end up with hidden accounts that now have a balance and still add up within your formulas, making it look like everything is hunky dory.

Remedy: Add a check in the total support column, this ensures that if the account is in use, the support will need to add up to the balance in the account in order to pass the check.

4. Formula errors within workpapers

Issue: My own personal pet peeve here - the worst thing you or an auditor can see is a typed balance to support an account with no way of linking this back to the beautiful table of transactions you've added alongside.

Remedy: Never type in a supporting balance! To me, this cell should always be formula driven. Make formulas your new habit for these cells - even if you link them back to manually typed data this will provide more insight and direct your eyes to more relevant information, so just do it! A formula driven cell is a good way to ensure that most errors are picked up, as there should always be a check between the account balance and your support. If it doesn't reconcile at the end of the day, you know there's either something missing or a formula error at some point in your data.

3. Balances changing after reporting

Issue: Nothing worse than a balance changing in Xero after your reconciliations have been all finalised and approved. First off, how do you know that a balance has changed? Do you dump the trial balance in at random intervals to check? Do you ask everyone in the office if they have posted a journal?

Remedy: Be sure to lock your month after your balance sheet recs have been finalised! Further, if you happen to unlock and redo anything in a particular month, ensure that you open up your recs again to check all is well. Some ERP systems such as Xero don't make it easy to find transactions based on the actual date they were entered, so be sure you keep track of any changes as they are being made.

In addition, make sure that the users in charge of unlocking and locking periods are tightly governed. Also make it a habit to communicate any unlocking/locking with those managing reconciliations.

2. Incomplete reconciliations

Issue: Spreadsheets can sometimes lead to "relaxed" approving of reconciliations. Support that hasn't been updated for months, or support that is simply missing. Support can also be correct, however an inordinate amount of time may have lapsed since the support was generated and action should have been taken.

Remedy: Firstly, it is the responsibility of the preparer to ensure that support is kept up to date, so the remedy here is an education piece on the value of up to date support. Ultimately, however, the remedy for this is to ensure that all accounts are approved in a timely manner - 2 sets of eyes will mean that twice the attention is drawn to outstanding items.

Ensure that all accounts have a current supporting balance, and one that makes sense.

Spend the extra time to find support where you can, or earmark a time during the month to ensure any unknown items are found and reported. Importantly, providing up to date commentary within your reconciliation to let anyone else know that things things are actively being followed up can be really helpful.

Keep track of what is outstanding, and follow these up as quickly as practicable.

1. Inadequate Approvals and Timelines

Issue: How do I know if I am doing my recs in a timely and effective manner? Do I need to do everything every month, or can I let a period of time lapse between each reconciliation?

Remedy: For me, the main goal of Balance Sheet Reconciliations has always been simple - no surprises. The best way to combat this? Ensure that recs are completed and approved on a timely basis. So what exactly is a timely basis?

Your timeline for reconciliations is usually determined by a mixture of resources, importance and reporting periods.

Fast moving accounts, for example, are probably slated for monthly reconciliations, especially if material balance changes occur. Mid-month is not possible for all accountants, however a "rolling" reconciliation completed weekly or fortnightly for your high risk fast moving accounts (such as merchant settlements), providing even more comfort.

On the other end of the spectrum, leaving reconciliations for up to 9-12 months may be applicable in certain circumstances, however this will typically be left for your companies with a smaller number of daily transactions, and with much lower materiality concerns.

How long should Balance Sheet Reconciliations take?

Typically most small businesses can be completed in only an hour or two if done monthly, however when we get into the more complex businesses with multiple expense and revenue streams, speaking in the range of several hours or even a couple of days may be more appropriate.

How RecHound can help?

A tricky aspect of Balance Sheet Reconciliations is that a lot of these pitfalls can be attributed to the use of spreadsheets.

Where spreadsheets are a quick and often effective way to get the job done, there are definitely more efficient and secure ways to manage your reconciliations if you choose.

RecHound has its own version of efficient remedies for each of the pitfalls mentioned in this article, so contact us if you want any further insight on this :)

Written by: Alex Lacota

AI usage: <3% + Image.

ImagePrompt: draw a greyhound upset with his spreadsheets in a cartoon style with colours that pop. Make him wearing a green tie and make it look like he's seen better days.

Writing time: 5 hours


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