What Needs to be Reconciled on Your Startup’s Balance Sheet?
The punch line here is that every single account on the balance sheet needs to be reconciled, not just the bank and the credit cards.
The reason is that if you don’t reconcile every account on the balance sheet, it’s a pretty easy way to hide transactions that should be on the PNL, or otherwise, can just go stale on the balance sheet.
And, since the accounting equation of assets = liabilities + equity must balance, if items on the balance sheet go stale it could throw off your other accounts!
Reconciling Balance Sheet Assets
So, let me break it down a little bit further. On the assets side, yes, of course, you do want to reconcile your bank account, but don’t forget about the other accounts, like accounts receivable aging. Go ahead and run that report, and look to see if there’s anything old or stale hanging out there. If there is, go ahead and write it off, otherwise you’re artificially inflating your revenue, and potentially pumping up your tax liability, which is not good.
Reconciling Balance Sheet Liabilities
On the liability side, of particular concern, is the payroll liabilities. Again, you’re going to want to make sure that you do reconcile that account on a daily, monthly, or weekly basis, just so that you know exactly how much you owe in taxes to the various state, and local, and even federal, taxing agencies. Otherwise, you might be hit with a big tax bill, lots of penalties, that’s not good at all.
Equity Reconciliation
You don’t need to reconcile your equity accounts all the time - but after a fund raise you really, really should! This is because your cap table depends on it! If an investor wire fails, you need to know so you can reach out and get the money into your account. Every few years, we bring on a new client where some investor (usually a seed or pre-seed investor) somehow never wired their investment, even though they signed their documents. This is a huge headache, so make sure you reconcile your cap table after every fundraise.
So, in sum, make sure that every single balance sheet account is reconciled, otherwise, your PNL might be askew in ways that you didn’t even know. Learn more about off-balance items and startups.
Want to learn more about startup accounting? Check out our accounting dictionary.
