How do I reconcile balance-sheet and general-ledger accounts (account reconciliations beyond the bank account) as part of the accounting close?

How is an account reconciliation different from a bank reconciliation?

A bank reconciliation has one obvious piece of support: the bank statement. Most other balance-sheet accounts have nothing that arrives in the mail, and that is why they get skipped. The principle is the same: you review each account to make sure the source documents match the balance shown in it.

Two things change once you leave cash behind.

• The support differs by account. For receivables it is a customer-level listing. For fixed assets it is an asset register and depreciation schedule. For a loan it is the lender's statement. For payroll liabilities it is payroll records and what was filed. For an accrual it is a schedule you prepare from invoices and contracts.
• The output is an explanation, not an agreed figure. A finished reconciliation shows the ledger balance, the supporting total, and every difference between them with its cause. A difference you cannot explain is not a rounding issue. It is the finding.

Which accounts should I reconcile, and how often?

Don't start from a fixed list. Start from your trial balance and ask four questions about every balance-sheet account:

1. What is it? Is it an asset or obligation that exists outside your books (a receivable, a loan, a tax owed), or an accounting construct (an accrual, a prepaid, accumulated depreciation)?
2. How much activity does it carry? Many entries a month means many chances for error.
3. What happens if it is wrong? Balances owed to tax authorities, lenders or employees carry consequences outside the business. A small, dormant deposit account carries few.
4. Should it clear? Clearing, suspense and "ask my accountant" accounts should be zero at month-end. Any balance in them needs explaining.

Frequency follows from the answers. Reconcile most accounts monthly as part of the close. High-risk or high-volume accounts, such as payroll liabilities, may need weekly or even daily attention. Low-activity accounts can be reconciled quarterly, provided adequate monitoring controls remain in place.

What does a reconciliation inventory look like?

Here is an inventory for a small distributor with outsourced payroll, one term loan and a few fixed assets. The details are invented.

A security deposit that has not moved in years might be checked once a year against the lease instead. Write that decision down, so leaving it off is a choice and not an oversight.

What counts as independent support for each type of account?

Support is independent when it was produced by something other than the entries you are testing. It comes in three strengths.

Third-party records. Lender statements, vendor statements and deposit confirmations come from outside your ledger. They are the strongest support available. Filed tax returns show what you reported to the authority; they are independent of your general ledger only when prepared from a payroll system outside it.

Subsidiary records. Receivables and payables have customer and vendor detail beneath the control account, and the subsidiary ledger's total must equal the control account. But in integrated accounting software the aging report and the control account are built from the same postings. Agreement between them proves only that no entry went straight to the control account. It does not prove the invoices are real or the payments were applied correctly. Test the detail as well: follow up aged items, and compare the largest vendor balances with the vendors' own statements.

Prepared schedules. Some accounts have no natural subledger, such as prepaids, accruals and deferred revenue. For these you build a schedule from the underlying documents: the policy, the contract, the invoice received after month-end. Fixed assets sit in between. Accumulated depreciation holds the total depreciation recorded on each asset over its life, so the schedule shows cost, accumulated depreciation and remaining value asset by asset. It must be calculated from the asset records, not copied from the ledger.

These reconciliations most often fail silently when a ledger balance is reconciled to a report exported from the same ledger. The two agree by construction, so the reconciliation looks complete while testing nothing. If your support is a report from the accounting system, ask what outside document stands behind it.

Why reconcile activity as well as the ending balance?

An ending balance can agree while the movement behind it is wrong in offsetting ways: a missed accrual one month, a duplicate the next. So accounts that roll forward (fixed assets, loans, accruals, payroll liabilities, equity) are reconciled by movement as well as by balance.

1. Agree the beginning balance to last period's reconciled ending balance. If it doesn't agree, something was posted to a closed period or last period's reconciliation was wrong. If the account hasn't been reconciled for a while, the error may be several periods back.
2. Match the period's transactions to the underlying documents: additions, disposals, payments, accruals.
3. Review every adjusting entry posted to the account in the period and confirm each is appropriate.
4. Confirm that every entry meant to reverse in the period did reverse.
5. Agree the ending balance to the support.

How do I reconcile payroll liabilities to payroll records and to what was filed?

Payroll liabilities are money you hold for others: tax withheld from employees, the employer's share of payroll taxes, and wages earned but not yet paid. A complete payroll reconciliation shows three things.

The accrual is right. Wages payable at month-end agrees to the days of work not yet paid, taken from the time records. The IRS expects you to keep the amounts and dates of all wage payments.

The liability cleared through deposits. For each tax liability account, the opening balance plus amounts withheld and accrued, less deposits made, should equal the closing balance. Each deposit traces to the record of its date and amount, which the IRS also expects you to keep. A remaining balance should equal the tax on the payrolls whose deposits are not yet due under your deposit schedule, listed payroll by payroll. Anything else is a difference to explain.

The books agree with what was filed. Compare the ledger's wages and withholding for the quarter with the employer's quarterly federal return, and keep copies of returns filed with their confirmation numbers. At year-end, compare the quarters with the annual wage statements. The IRS does this matching itself: it compares the four quarterly Forms 941 with the Form W-2 totals on the annual Form W-3. The quarterly return reports wages you've paid. So a difference between your ledger and the returns is either a timing item (wages accrued at quarter-end but paid, and so reported, in the next quarter), which you carry with its evidence, or an error in the books or the filing. Find out which before the IRS asks. Apply the same comparison to each state withholding and unemployment return you file; the forms and periods vary by state and are not covered here.

This reconciliation doesn't set any deposit schedule or due date. It shows that what you recorded, what you paid and what you reported are the same numbers.

What if an outside provider runs payroll?

The records and the filings sit with the provider, so obtain them every period: the payroll register, the liability or tax-summary report, deposit confirmations, and a copy of each return filed with its confirmation. Reconcile your ledger to those reports. Don't treat the provider's journal entry as proof of itself. The obligation generally does not move to the provider. Generally, as the employer you remain responsible for making sure returns are filed and deposits made, even when a third party does the work, and you stay responsible if that third party fails to act. The exception is a certified professional employer organization (CPEO): for wages it pays under a CPEO contract, the CPEO is generally treated as the employer for employment tax purposes. If that is your arrangement, confirm with the CPEO which returns it files.

What must the finished reconciliation document show?

Someone who did not prepare the reconciliation should be able to re-perform it from the document alone. Each one shows:

• The account, the period end and the ledger balance.
• The support relied on, named specifically (which statement, which report, which date) and attached.
• The supporting total.
• Each reconciling item, with its amount, its cause and its disposition (below).
• Any remaining unexplained amount, stated even when it is zero.
• Who prepared it and when, and who reviewed it and when, with what the reviewer checked.

Documentation that lets someone trace every transaction is what makes this a control rather than a worksheet. Any adjustment the reconciliation produces is documented the same way: the debit and credit accounts, a clear description, and a reference to the supporting documentation.

How do I dispose of each difference?

Every reconciling item goes down exactly one of three paths.

A supported item expected to clear. A payment in transit to a vendor, or an invoice received after month-end for an accrual. Carry it with its evidence and note when it should clear. Check next month that it did. An item that doesn't clear on time has become an unexplained difference, and should not simply roll forward again.

An identified error. A duplicate entry, a wrong account, a transposed number, a missed reversal. Correct it with a journal entry, which is reviewed and approved like every other reconciliation adjustment. Record the correction before the statements for the period are prepared. If the error belongs to a period whose statements were already issued, don't post into that closed period; whether the earlier statements must be corrected and reissued is a question for your accountant or for whoever received them.

An unsupported residual. A difference you cannot explain after reasonable investigation. Don't clear it on your own authority. Record what was tried, escalate it to the reviewer named for that account on your inventory, and write it off only after someone other than the preparer has approved the entry. Separating duties exists to put a check and balance in place, and an unexplained write-off is where that check matters most.

Size does not settle it. A small net difference can hide two large errors going in opposite directions. SEC staff guidance written for public-company reporting states the principle plainly: "misstatements are not immaterial simply because they fall beneath a numerical threshold." Find out what a difference is before deciding it doesn't matter. Rolling an unexplained amount forward month after month is the worst outcome: it becomes part of the account's normal look, and nobody investigates it again.

What does one account look like from ledger balance to sign-off?

Here is accounts payable at March 31. The figures are invented.

The ledger's accounts payable balance is 18,420.00, and the vendor aging totals 18,420.00. That agreement shows only that nothing was posted directly to the control account. So the preparer tests the largest vendor against its statement.

The raw difference was 550.00. It was made of a 2,400.00 timing item and a 1,850.00 error pointing in opposite directions. That is exactly why a small difference is investigated rather than accepted.

The duplicate is corrected:

In accounting software, void the duplicate bill or apply this entry to it, so the vendor aging still agrees to the control account after the correction.

Check 2291 is carried forward with a copy of the check and a note to confirm it clears in April.

The bookkeeper prepared the reconciliation on April 4 and attached the statement, the aging and both copies of invoice 4417. The owner reviewed it on April 6. The owner re-added the schedule, agreed the statement balance to the vendor's document, found check 2291 among April's cleared payments, and approved the correcting entry. A reviewer's signature without that work is worse than none, because it tells everyone else the account has been checked.

Who reviews it when there is no second finance person?

Review means a second person checking and challenging the work. A signature alone is not review. In small businesses, cost often gets in the way of dividing duties. The practical answer is to make the owner the reviewer, because an owner close to every function knows the business well enough to spot what looks wrong. The owner doesn't need to redo everything. The owner traces a sample of items to the support, questions anything carried forward, and personally approves every write-off. Where the owner also keeps the books, have an outside accountant periodically review the higher-risk reconciliations. In that case the write-off of an unsupported residual waits for the outside accountant's approval; until then the amount stays recorded as a finding on the inventory, not cleared. How to divide incompatible duties more broadly is a separate question.

In what order should reconciliations happen in the close?

Reconciliations exist to support the statements, so they come first.

1. Post the period's routine entries and accruals.
2. Reconcile the high-risk accounts first (payroll liabilities, clearing accounts, receivables, payables), because their corrections affect other accounts.
3. Reconcile the rest of the inventory and post every correcting entry.
4. Review and approve the reconciliations and their adjustments.
5. Prepare the statements.
6. Tie the statements to the ledger (next section).
7. Lock the period.

If a reconciliation isn't finished when the statements are due, the statements rest on an untested balance. Either hold them, or tell whoever receives them which account was unreconciled and why. Reconciliations prepared after the statements go out never influenced them. They record work that was done, but they don't back up the statements.

How do I tie the financial statements back to the reconciliations?

Once the statements are drafted, work backwards. Add up the asset, liability and equity accounts and check the totals against the matching balance-sheet lines. Then, for each line, list the ledger accounts that make it up. Confirm that each one has a reviewed reconciliation for the period, or a recorded decision about why it isn't on the inventory. Flag any line that includes an unreconciled account, or an account with an open finding, before the statements leave your hands.

What if an account has no support at all?

Work through the possibilities in order:

• An independent record exists. Reconcile to it.
• No independent record exists, but the balance can be rebuilt. Prepare a schedule from the source documents and record how it was built, so a reviewer can judge the basis.
• Nothing can be found. Examples are a leftover balance from a software conversion, or an old clearing account whose history is lost. Record it as a finding: the amount, the account, how long it has been there, what was searched, and the fact that it could not be supported. Mark it unreconciled on the inventory. Then escalate it for a write-off decision, which follows the approval route for unsupported residuals.

An unsupported balance is never marked reconciled. If your programme quietly leaves out the accounts nobody can support, it has left out its highest-risk balances.

What changes when the statements go to a lender, investor or outside accountant?

Now someone who did not prepare the reconciliations will rely on them. Keep each reconciliation with its attached support, its adjustments and its review evidence, so the package can be handed over without rebuilding it. Keep the support at least as long as the IRS expects records to be kept. That is generally 3 years after the return the records support was filed, with longer periods in the situations the IRS lists. Generally, records behind the fixed-asset schedule are kept until the period of limitations runs for the year the asset is disposed of. Employment tax records must be kept for at least 4 years after the tax becomes due or is paid, whichever is later. What a reviewer or auditor then does with the package is their work, not part of your close.