Reconciling the Balance Sheet: The First Step in Closing the Books

Closing the books is a fundamental part of the accounting cycle. It ensures that your financial records are not only complete, but are accurate, and even compliant. It also sets you up for timely reporting and thorough analysis. In this blog post, we’ll guide you through the key steps, focusing on reconciling the balance sheet and validating the Balance Sheet accounts to accurately showcase your company’s financial position.

Why The Balance Sheet Comes First

The Balance Sheet accounts (assets, liabilities, and equity) are more than just a snapshot of your company’s financial health. They are the basis of your Profit & Loss (P&L) activity. Most income and expense transactions originate from asset or liability changes, such as purchases, payments, sales, or loan activity. That’s why it’s crucial to get these balances right before analyzing the P&L.

Two Ways To Support Account Balances

Balance Sheet accounts are supported in two primary ways:

1. Reconciling: Matching the account balance to an external source of truth, such as a bank or loan statement.
2. Validating: Confirming the account balance by generating a detailed report that substantiates what comprises the balance.

You’ll use one of these two methods based on the nature of each account.

Accounts Typically Reconciled:

These accounts have statements issued by financial institutions:

• Checking and savings accounts
• Petty cash
• Credit cards
• Investment accounts
• Lines of credit
• Bank loans and mortgages

Accounts Typically Validated

These accounts don’t have external statements but need internal detail verification:

• Accounts receivable
• Inventory
• Fixed and other assets
• Accounts payable
• Equity accounts
• Other liabilities

Substantiating these balances is non-negotiable. Inaccurate or unsupported balances mean your financial reports can’t be trusted.

Reconciling Accounts with Statements

Reconciliation is about comparing your books to third-party data to ensure they match. Start by focusing on accounts that offer official statements.

Step by Step: Reconcile Banks Accounts in QBO

1. Navigate to your Closed Periods spreadsheet and filter for accounts marked “R” (for Reconcile).
2. Start with your main checking account.
3. In QuickBooks Online (QBO), go to: https://app.qbo.intuit.com/app/reconcile
4. Select your account from the dropdown.
5. If available, use the View Statements button to open your bank statement directly in QBO.
6. If not, download the statement from your bank’s website.

QBO’s Reconcile tool matches transactions on your books with those on the statement. When completed, it confirms that your Balance Sheet balance equals your bank’s reported balance.

Using the Reconcile Tool Beyond Banks

Most Balance Sheet accounts can be reconciled even if they aren’t tied to a financial institution.

Exceptions include:

• Undeposited Funds
• Accounts Receivable
• Accounts Payable
• Retained Earnings

All other accounts, including sub-accounts (like cardholder-specific credit cards under a parent Visa account), can be reconciled. Choose to reconcile sub-accounts individually or as a group based on how your statements are formatted.

Understanding Reconciliation Status

Each transaction moves through three statuses:

• Uncleared: Not matched or reconciled
• Cleared: Matched in bank feed or checked off in Reconcile screen
• Reconciled: Included in a finished reconciliation

Always use the Reconcile tool to update these statuses to maintain audit trails and accurate reconciliation history.

The Role of the Register

Each Balance Sheet account has a register showing its transaction activity and reconciliation status (blank, C for Cleared, R for Reconciled).

While you can change a transaction’s status in the register, this should only be done by someone who understands the implications. It’s safer and more transparent to use the Reconcile tool.

Reconciliation Reports

When you complete a reconciliation, QBO generates a Reconciliation Report:

• Go to Gear > Tools > Reconcile > History by Account > View Report
• This report documents:
  • What was reconciled
  • What remains open
  • The difference between bank and book balances
• Save a PDF copy and upload it to your Close spreadsheet as part of your month-end support

Recon Change Alerts

If reconciled transactions are later altered (amount changed, status updated, or deleted), QBO flags them at the top of the report in the Reconciliation Change Report section.

• It highlights:
  • What changed
  • When
  • How much
• Once corrected, this section disappears, restoring the integrity of your report.

Uncleared Transactions

What about transactions that didn’t show up on the statement? These are “uncleared” or “open” transactions:

• Outstanding checks
• Late-day deposits
• Book entries that haven’t cleared the bank

These transactions:

• Are recorded in your books
• But haven’t been confirmed by the bank

Find them in the Summary section of the Reconciliation Report:

• “Uncleared transactions as of MM/DD/YYYY” shows the total
• Scroll further to see each transaction listed under “Uncleared checks and payments”

These are the reasons your book balance may differ from the bank balance, which is especially important for period-end cutoffs.

Diagnosing Mid-Month Balance Differences

Sometimes you spot a mismatch between the bank and book balance mid-month. What then?

Check the Bank Feed:

• Go to the Banking screen
• Review the “For Review” tab
• Unmatched transactions = activity on the bank that isn’t in your books

Check the Register:

• Filter for “No Status”
• These are transactions recorded in your books that haven’t cleared the bank

The mismatch = bank feed transactions not yet recorded + book transactions not yet cleared

By reconciling statements, validating activity, and analyzing uncleared transactions, you ensure your Balance Sheet is rock-solid before moving on to closing the books.

Conclusion

Closing the books isn’t just a task, it’s the foundation of reliable financial reporting. By carefully reconciling and validating your Balance Sheet accounts on a consistent basis, you create confidence in your numbers and clarity in your business decisions. With a clean Balance Sheet in place, you’re now ready to move forward and analyze your Profit & Loss with precision.