Shortly before the end of the financial year, Müller & Co. has its accounts audited by the auditing firm Becker & Partner. The auditor, Mr. Schneider, discovers discrepancies in the accounts receivable: some receivables do not match the incoming payments. In order to clarify these differences, he requests balance confirmations from business partners to reconcile the accounting data.
However, before the confirmation letters are sent out, the companies concerned must be informed. But what exactly is a balance confirmation?
A balance confirmation is an official confirmation of the current balance (amount) of an account on a specific key date. It serves as an instrument for checking the existence, amount and timing of receivables and liabilities.
Auditors, companies and banks use them to ensure the accuracy of accounting. Particularly in the context of annual audit the balance confirmation plays an important role, as it helps to identify any differences or errors in the accounts at an early stage.
Good to know: Corporations such as GmbHs and AGs are subject to an audit in accordance with Section 267 HGB if they meet at least two of the following criteria for two consecutive years: Balance sheet total over €7.5 million, sales revenue over €15 million or more than 50 employees. Small companies are exempt from this requirement.
Confirmation is provided by the business partner, who compares the balance request received with their own accounting documents. If the balance shown is correct, it is confirmed. In the event of discrepancies, the recipient has the option of explaining these and enclosing the relevant evidence.
When a company receives a balance confirmation, it is important to understand what exactly is meant by it and what steps are required. The balance confirmation serves not only as a formal request, but also as a reconciliation between the company's own accounts and the information from the requesting company or auditor.
Example scenario: A supplier, XYZ GmbH, receives a balance confirmation from one of its customers, Meier AG. According to Meier AG's books, there is an outstanding receivable of €15,000. XYZ GmbH checks its accounts and discovers that it has only issued €10,000. A further check shows that an invoice has been booked twice. XYZ GmbH reports the error to the auditor, submits evidence and requests a correction. Without this clarification, Meier AG might have reported an incorrect balance sheet value.
This process ensures that the accounting data is correct and that the company's financial position is properly presented. An inaccurate or incorrect confirmation can lead to queries and delays, which could complicate the audit of the annual financial statements.
In the following, we take a step-by-step look at the components of a balance confirmation request. Some of the examples shown here are taken from a sample template from ContractHero and - unless taken directly from it - are for illustrative purposes. However, the template itself can be used as a sound basis for your own balance confirmations.
Company name & address: Müller & Co. GmbH, Hauptstraße 15, 10117 Berlin
Explanation: The complete and correct company address ensures that the request can be assigned to the correct company. Incorrect or incomplete information could lead to delays or misunderstandings.
Title and date: Balance confirmation as at 31.12.2023
Explanation: The date indicates the relevant cut-off date on which the balance is checked. An incorrect or missing date could result in the confirmation referring to an incorrect period.
Subject with key date and reference number
Example: Subject: Balance confirmation as at 31.12.2023 - debtor no. 123456
Explanation: Specifying a reference number (e.g. customer or vendor number) makes it easier to assign the balance confirmation and avoids confusion.
Name, address and contact details of the auditor
Example: Becker & Partner, Wirtschaftsprüfungsgesellschaft, Friedrichstraße 22, 10117 Berlin, e-mail: audit@beckerpartner.de
Explanation: The contact details of the auditor enable direct queries or clarification in the event of deviations or uncertainties.
Balance to be confirmed and reporting date
Example: The balance of your account as at 31.12.2023 is € 15,000 according to our records.
Explanation: The exact amount must be specified to enable precise confirmation or correction. Unclear or incomplete information could lead to queries or misinterpretations.
Method of confirmation (positive or negative)
Example: Please confirm this amount or inform us of any discrepancies.
Explanation: In the case of a positive confirmation, the recipient must actively respond and verify or correct the balance. With a negative confirmation, a response is only expected in the event of discrepancies.
Signature
Explanation: An authorized person must sign the balance confirmation. Missing or unauthorized signatures could call the validity of the confirmation into question.
Reply form
(Confirmation or rejection of the balance, space for corrections, signature field, date field)
Explanation: The form enables clear feedback. Without this form, misunderstandings could arise or important information could be missing.
Yes, a balance confirmation can be sent by e-mail, but it should be ensured that it is tamper-proof. The use of digital signatures and secure document management systems such as ContractHero offer a legally compliant and secure way of sending and tracking balance confirmations digitally.
Now that the structure of a balance confirmation is clear, the question arises: How is a balance calculated? To understand this, let's take a closer look at the methods used to determine receivables and payables.
A balance indicates how much credit or debit there is in an account. It is calculated by the difference between "debit and credit entries". Income and expenditure are offset against each other. A positive balance means that the company has a credit balance or outstanding receivables, while a negative balance indicates existing liabilities.
A common misconception is that the balance is not the same as the account balance. While the account balance only shows payments that have already been posted, the balance also includes transactions that have not yet been posted or are due. This means that an account can have a credit balance even though there are still outstanding liabilities.
Basically, the most relevant terms are the daily balance, the status of a day's bookings, and the annual closing balance - in accordance with Section 355 (1) HGB - which describes all financial movements within a year. Closing balances are usually calculated monthly to ensure a precise financial overview.
Precise balance reconciliation is essential in order to identify discrepancies at an early stage and minimize financial risks.
After checking the balance, the company must provide feedback. There are different methods of confirmation, which differ in their binding nature.
The negative balance confirmation only requires a response if a discrepancy is detected. If there is no response, the balance is either deemed to be tacitly confirmed or it remains unclear whether the recipient has ignored the request or actually considers the balance to be correct. This uncertainty can lead to problems in further checks.
In contrast, the positive balance confirmation requires active feedback. The recipient must either verify the specified balance or, in the event of discrepancies, submit an explanation together with the relevant documents. There are two variants: With the open method, the recipient is simply asked for their balance without receiving a specification. This requires a detailed check of the recipient's own bookkeeping. With the open method, the recipient receives a suggested balance which they can either validate or correct. These methods are particularly important for creditors and debtors in order to create clarity about receivables and liabilities.
In certain cases, a balance confirmation can have legal consequences. If a company signs an incorrect balance confirmation, this can be regarded as an acknowledgement of debt. This means that in the event of a dispute, it will be more difficult to dispute a claim as the company has already confirmed the balance.
An example: The supplier Müller & Co. receives a balance confirmation for €10,000, which he signs without checking it further. It later transpires that an invoice that has already been paid was incorrectly booked as open and the actual balance should only have been €8,000. As the balance confirmation had already been signed, this could be interpreted as recognition of the full €10,000. In the event of a dispute, Müller & Co. would have difficulties in subsequently enforcing the correction of the difference.
It is therefore crucial to check each balance confirmation carefully and, if in doubt, to ask questions before signing it.
In principle, there is no legal obligation to complete or respond to a balance confirmation. Nevertheless, a response can be useful in order to avoid ambiguities, demonstrate transparent accounting and strengthen trust with business partners and authorities. In addition, an unanswered inquiry can lead to further queries or more intensive checks, which could result in additional work. In such cases, it is advisable to consult a tax consultant or auditor to avoid possible consequences.
In summary, the balance confirmation is a key tool for ensuring the correctness of accounting and identifying any differences at an early stage. It is particularly essential for companies subject to mandatory audits in order to ensure the accuracy of the annual financial statements and minimize potential financial risks.
With a professional template like the one from ContractHero, you save time and avoid errors when creating and managing balance confirmations. ContractHero enables you to securely create, digitally sign and send contracts and documents - a decisive advantage for legally compliant and efficient processing. In addition, the central administration allows you to keep track of relevant financial data at all times and search for important information in a targeted manner.
Use our balance confirmation template and optimize your contract and financial management with ContractHero!
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