Balance confirmation

What it means

Balance confirmation is the mutual confirmation of receivables and payables between two business partners as at a given date, most often the balance sheet date. One party sends the other a list of open invoices and payments from its sub-ledger, and the other confirms agreement or states the differences.

It forms part of the stocktake of receivables and payables, which checks that the books match reality. For balances this is not a physical count but a documentary one: confirmation from the partner is the strongest evidence that the balance exists.

Confirmation uncovers errors that are otherwise hard to find: unposted invoices or credit notes, payments matched to the wrong invoice, duplicate payments, forgotten set-offs or disputed items that one side does not know about.

How it works in practice

Before year end we send confirmation requests mainly to the largest customers and suppliers and to partners with unusually old items. Between related companies in a group, confirmation is essential, because any mismatch shows up immediately in consolidation or a transfer pricing review.

We compare partners’ replies with the books and explain every difference. Timing differences, where a payment or invoice was in transit, are common. Genuine errors are corrected before the books are closed so that the financial statements are right.

A set-off of mutual claims is often agreed during confirmation, simplifying payments. A confirmed balance can also interrupt or affect the limitation period where it amounts to acknowledging the debt, which is useful for older receivables.

What to watch out for

The most common mistake is a confirmation request nobody answers, which the company then treats as done. Without a reply it is not a confirmation, and at an audit the balance is verified by other means. With important partners the reply should be chased.

The second risk is signing a partner’s confirmation without checking it. A confirmed balance may amount to acknowledging a debt, and if it includes an item the company disputes, defending itself later is hard. Before signing, compare the list with your own books.