Balance sheet reconciliation: how to reconcile every account, step by step

The trial balance balances. So why the knot in your stomach?

Take Priya, who keeps the books for a twelve-person design studio in Leeds, as an example. It is the second working day of November and the October management accounts are due on Friday. The trial balance balances to the penny, the bank feed is up to date and the VAT return for the quarter to 30 September went in a fortnight ago. And yet the balance sheet has a suspense account showing £412.18, a debtors figure the managing director does not believe, and a VAT balance nobody can explain without opening last quarter's return.

A trial balance that balances only proves the debits equal the credits. It says nothing about whether each balance is right. That is the job of a balance sheet reconciliation: proving, one account at a time, that every figure on the balance sheet agrees with something outside the ledger. Here is how to do a balance sheet reconciliation in the UK, account by account, with the numbers worked through.

What is balance sheet reconciliation?

The meaning of balance sheet reconciliation is simple to state. For each asset, liability and equity account in the general ledger, you take the closing balance and show that it agrees with a source that does not come from the ledger itself, or you explain exactly why it does not. That source might be a bank or lender statement, a subledger such as the aged debtors report, a VAT return, a payroll summary, a fixed asset register or a schedule you build from invoices.

You will also see it called balance sheet account reconciliation, general ledger reconciliation or GL reconciliation. They describe the same discipline. Profit and loss accounts are reviewed rather than reconciled, because there is no outside balance to agree them to; but most errors in the profit and loss account show up on the balance sheet first. A missing accrual understates both creditors and costs. A prepayment that is never released overstates both assets and profit. Get the balance sheet right and the profit figure usually follows.

The output is a short working paper for each account: the ledger balance, the supporting balance, the difference, a list of the items that explain it, and who prepared and reviewed it, and when. Those papers are what a reviewer, an auditor or an HMRC enquiry will ask to see.

The three types of reconciliation

Accountants usually group reconciliations into three families, and a balance sheet reconciliation draws on all of them.

If you have only ever reconciled the bank, the other two families are where the surprises live. Our guide to reconciliation discrepancies covers the bank side in depth, and the reconciliation FAQ answers the definitions people search for most.

The five-step reconciliation process

The same five steps work for every account on the balance sheet. They are the steps of a bank reconciliation, generalised:

1. Gather both sides for the same date. The closing ledger balance at the month end, and the outside evidence at the same date: the statement, the subledger report, the return or the schedule.
2. Compare them line by line where you can. For the bank that means ticking statement lines to ledger entries. For a control account it means comparing the control total with the subledger total, then drilling into any contact that differs.
3. List what is left. Every difference goes on the working paper with a reason: timing (in the ledger but not yet on the evidence, or the reverse), an error, or something not yet recorded.
4. Correct the books for the items that belong in them. Post the journal, the missing invoice or the bank charge. Timing differences are noted, not corrected, and should clear next month.
5. Prove it and sign it off. The adjusted ledger balance must equal the adjusted evidence. The preparer signs and dates the paper; a second person reviews it.

Which balance sheet accounts should be reconciled?

All of them: most at each month end you report on, a few (share capital) only at the year end. In practice the list for a small UK company looks like this:

How to reconcile a balance sheet, account by account

Back to Priya and the studio's October month end. Every example below adds up, so you can use the layout as a template for your own working papers.

Bank and cash

The bank is the one reconciliation most businesses already do. The ledger shows £18,430.50 at 31 October; the statement shows £19,105.30. Three items explain the gap.

The bank charges are posted; the other two items are timing and should clear in November. If the bank side is the slow part of your month end, Bank Reconciler matches the statement to the books line by line, and the free bank reconciliation template sets out the statement above.

Debtors control (accounts receivable)

The debtors control account in the nominal ledger should equal the total of the aged debtors report, because every invoice and receipt posts to both. The studio's control shows £24,850.00; the aged debtors report totals £24,610.00. A difference of £240.00.

The cause is the usual one: a journal posted straight to the control account instead of through a customer. Someone reversed a £240.00 write-off in the nominal ledger, so the control went up but no customer's account did. The fix is to reverse the journal and redo it through the customer, so the debt appears against the right name and can be chased. After that, both sides show £24,850.00.

Once the totals agree, read the aged report itself. Old items, credit balances and unallocated receipts are not reconciliation differences, but they are the questions a reviewer will ask next.

Creditors control (accounts payable)

Do the same for creditors: the control account against the aged creditors report. At the studio both show £15,312.40, so the totals agree. The deeper check is supplier statements. The print supplier's statement says £3,180.00; the purchase ledger says £2,940.00.

The invoice is a real October cost, so it is either posted when it arrives or accrued at the month end. Reconcile the statements of your largest suppliers every month, and the rest at least quarterly.

VAT control

The VAT control account should equal what you owe HMRC: the last return not yet paid, plus the VAT on everything since the end of that period. The studio files quarterly, and the return for July to September showed £5,890.00 due in box 5, payable in November. October's sales and purchases carry net VAT of £324.00.

When the two disagree, the usual suspects are a transaction posted into an already-filed period, a VAT code changed after filing, or a payment to HMRC coded somewhere else. Our VAT reconciliation guide walks through each.

PAYE and National Insurance

The PAYE liability should equal what the payroll says is due to HMRC for the month, less anything already paid. October's payroll gives £2,310.40 of PAYE, £412.56 of employee National Insurance and £868.00 of employer National Insurance: £3,590.96 in all, due on 22 November. The ledger shows £3,590.96. If it did not, check whether the payroll journal and the payment were posted to the same account, and whether September's payment cleared September's liability.

Accruals

An accrual is a cost you have incurred but not yet been invoiced for. Reconcile the accruals account to a schedule listing each item, its basis and when it will reverse.

An accrual that is never reversed when the invoice arrives doubles the cost, so tie each line to the invoice that clears it.

Prepayments

A prepayment is the reverse: you have paid for something you have not yet used. The studio paid £4,800.00 on 1 July for a year's insurance, and £1,200.00 on 1 October for a year's software licence.

If the ledger shows more than the schedule, a month's release has been missed and the costs are understated.

Fixed assets and depreciation

Agree the cost and accumulated depreciation accounts to the fixed asset register, which lists each asset, its cost, the depreciation charged and its net book value. The studio's register shows cost of £48,000.00 and accumulated depreciation of £19,650.00, a net book value of £28,350.00, and the ledger agrees. Differences usually come from a purchase coded to expenses instead of assets, a disposal removed from the register but not the ledger, or depreciation posted for the wrong number of months.

Loans and hire purchase

Agree each loan to the lender's statement. The studio's ledger shows £36,412.80 on its bank loan; the lender's statement shows £35,912.80. The October instalment of £620.00 was coded entirely to interest, when £500.00 of it repaid capital and only £120.00 was interest. Reclassify the £500.00 from interest to the loan and both show £35,912.80. At the year end, split each loan between the amount due within a year and the amount due later, because the balance sheet shows them separately.

Director's loan account

The director's loan account records money moving between the company and its directors outside salary and dividends. Reconcile it to the director's own record of what they have taken and paid in. It matters most at the year end: if a director owes the company money and the loan is not repaid within nine months of the year end, the company pays Corporation Tax on it at 33.75% (32.5% for loans made before 6 April 2022), reclaimable once the loan is repaid, written off or released (GOV.UK, director's loans). An overdrawn balance of £4,200.00 left outstanding would mean £1,417.50 of tax. If the director owes the company more than £10,000 at any time in the year, the loan is also treated as a benefit in kind.

Suspense and clearing accounts

Suspense is where entries go when nobody knows where they belong, and it should be empty at every month end. Priya's £412.18 turned out to be two items: a £400.00 transfer from the managing director's personal account, which belongs on the director's loan account, and £12.18 of bank interest. Post both and suspense is nil. Clearing accounts for wages, card processors or marketplace payouts work the same way: they should net to nil once each payout is matched.

A balance sheet reconciliation template and format

Whatever software you use, every account's working paper needs the same columns. A one-page summary in this format, with the detailed workings behind each line, is the usual balance sheet reconciliation template:

Ledger balances shown after the month-end corrections. Keep the before-and-after figures in each detailed working.

For the balance sheet itself, our free balance sheet template lays out the statement in the UK format; for the bank line, the bank reconciliation template produces the statement you file behind it.

A month-end checklist

Common discrepancies, and what causes them

• Journals posted straight to a control account. The control and its subledger drift apart. Post through the customer or supplier instead.
• Transactions posted into a closed period. Last month's reconciliation no longer agrees, and a filed VAT return no longer matches the ledger.
• Duplicates. A bill entered by hand and again from a bank feed, or a bank line imported twice.
• Loan instalments coded wholly to interest. The loan never reduces in the books.
• Accruals never reversed. The cost appears twice when the invoice arrives.
• Prepayments never released. Profit is overstated month after month.
• Assets expensed, or expenses capitalised. The register and the ledger tell different stories.
• Transposed figures. A difference divisible by nine often means two digits swapped, for example £54.00 keyed as £45.00.

Where software takes the strain

Most of a balance sheet reconciliation is judgement, but the matching is mechanical, and that part is worth handing over.

• Bank Reconciler reconciles bank, card and payment-processor statements against the books from Xero, QuickBooks, Sage, Pandle, FreeAgent or YNAB, and matches invoices to payments. It does the bank and cash part of the job; the accruals, prepayments and control accounts above are reconciled in your accounting software.
• IQ Books keeps the whole ledger. Each bank account has a Reconcile tab that matches a statement to the ledger and fixes differences with proper journals, the aged debtors and creditors reports are built from the control account postings so they tie to it, and it keeps a fixed asset register and prepayments and accruals schedules alongside the ledger.
• PrepIQ prepares the year-end working papers for accountants, including the finance reconciliations for loans and hire purchase, with every posted figure linked back to its working.