Are You Overlooking Balance Sheet Reconciliations? It Could Impact Your Taxes

Why Balance Sheet Reconciliation Matters for Tax Season—And How It Impacts Your Bottom Line

As a startup founder, you’re likely used to reviewing your Profit & Loss (P&L) statement to track revenue and expenses. But if you’re not also performing balance sheet reconciliation regularly—monthly, quarterly, or at the very least annually—you’re missing a crucial piece of financial oversight.

A balance sheet reconciliation ensures that transactions in your general ledger are accounted for correctly. Ignoring it can lead to hidden errors that distort your financial performance, impact tax filings, and create costly surprises. A good accountant knows this and will maintain detailed workpapers to support each account’s balance.

Here are a few examples of why balance sheet reconciliation matters and some common pitfalls that could be lurking:

1. Unreconciled Bank Transactions Can Skew Your Financials

Your bookkeeper is (hopefully) performing balance sheet reconciliation and reconciling bank statements every month. But even if your bank balance ties out, unreconciled transactions can still distort your P&L and balance sheet.

• Uncleared expenses – If there are old transactions sitting unreconciled, they could represent errors or duplicates, which means your expenses may be overstated. When expenses are overstated, your operating income looks lower than it actually is. It’s important for your accountant to review the unreconciled transactions every month to confirm they are still valid.
• Uncleared deposits – If a deposit is recorded but never clears the bank, it could signal a few issues. Did the customer send a physical check that was recorded in QuickBooks but never deposited? Was the deposit recorded but never actually received? If deposits remain unreconciled, your balance sheet reconciliation will be inaccurate, and your Accounts Receivable may not reflect what is truly owed.

By reconciling your bank balance and reviewing unreconciled transactions, you ensure accuracy in both your balance sheet and your P&L.

2. Prepaid Expenses That Never Get Amortized

Many startups pay for annual subscriptions, insurance policies, or software upfront. These should be recorded as prepaid expenses and amortized over time. However, if your accountant forgets to move the expense out of the prepaid account and into the P&L as it’s used:

• Expenses will be understated, making your business look more profitable than it actually is.
• The balance sheet reconciliation will show “phantom” assets that should have been expensed long ago.

A proper balance sheet reconciliation ensures prepaid expenses are correctly reduced each month, keeping both your P&L and balance sheet clean.

3. Accrued Payroll & Payroll Taxes That Don’t Reverse

Accrued payroll accounts track wages earned but not yet paid. For example, a pay period may end on December 31, but employees don’t get paid until early January. Or you may accrue bonuses throughout the year to be paid the following year. Accruing wages in the period earned is a normal accounting practice, but here’s where it can go wrong:

• If payroll accruals aren’t reversed when wages are paid, you could be double-counting payroll expenses.
• If bonuses aren’t matched to their accruals, they could be recorded twice, overstating expenses and impacting tax deductions.

A thorough balance sheet reconciliation ensures these accounts are accurate, preventing misstatements in your tax filings and financial reports.

What to Do Now:

• Ensure your balance sheet reconciliation is fully completed before filing your taxes.
• Ask your accountant if they maintain supporting workpapers for each balance sheet account.
• Set up a process for monthly or quarterly balance sheet reconciliations—not just once a year.

A clean balance sheet reconciliation leads to a more accurate P&L, which means better financial decisions for your business.