Why your equity does not reconcile, and how to fix it

The reconciliation of equity is a simple sum: the opening balance, plus the result for this year, plus your contributions, minus your drawings and the dividend — that must be the closing balance shown on your balance sheet. If the sum does not add up, there is almost always an error in your figures.

The most common mistake: the closing balance as opening balance

Anyone filling in a balance sheet for the first time sees, for example, “Capital € 500” and thinks: that is my opening balance. But the amount on the balance sheet is the position on the balance sheet date — at the end of the financial year. This year’s result is already included in it.

The four items that are usually missing

• •Private withdrawals and contributions: they affect your equity, not your result.
• •The proposed dividend: it comes off the result and is shown as a liability on the balance sheet.
• •A correction of a previous financial year that has not been included in the opening balance.
• •A depreciation that is in the profit and loss account but has not been recorded on the balance sheet (or the other way round).

How to trace a difference

Would you rather run your own figures through the formula first? Then use the calculator calculate your equity.

1. 1.Put the opening balance, the result, the contributions, the drawings and the dividend one below the other.
2. 2.Add them up and compare the outcome with the equity on your balance sheet.
3. 3.Is the difference exactly the result? Then the opening balance is probably this year's closing balance.
4. 4.Is the difference exactly a withdrawal or contribution? Then it has not been recorded.
5. 5.Is the difference small (a few euros)? Look for a rounding or a missed entry in the bank costs.

Why it stands out extra for a sole trader

A BV often has several equity items: share capital, share premium and reserves. For a sole trader or VOF there is usually one item, for example “Capital”, and sometimes a separate item for your private account. That makes it harder to see which part of that amount comes from the past and which part from this year. Precisely then the reconciliation is the tool: it forces you to make the distinction.

What a good tool does for you

Doubting whether you can do this yourself? On preparing annual accounts without an accountant you can read what you do yourself and what certainty you then miss out on.

In a structured route you are not presented with the opening balance as the closing balance: in a first financial year the opening balance is zero, and in a following financial year it comes from the previous year. The difference that remains you see straight away, together with the item that causes it.