An account reconciliation refers to the process of reconciling an account balance to specified source data to ensure a balance is complete and accurate.
Generally, account reconciliations in finance and accounting compare the general ledger balance of an account to independent systems, third-party data, or other supporting documentation to substantiate the balance stated in the general ledger. The accountant responsible for the reconciliation must carefully review transactions and cross-reference them with multiple sources to verify the accuracy of those transactions in the composition of the balance.
Account reconciliations are typically done at the end of an accounting period, such as at the time of the monthly close. This ensures transactions that are being closed out are properly verified and the closing statements are accurate.
To reconcile different transactions to balances, accountants will compare the details in the business ledger to documents provided or maintained in outside sources, like a bank or vendor. These can include such documents as invoices, receipts, and transaction statements.
Account reconciliations are a critical accounting activity performed routinely, typically monthly, to ensure the validity of a business’s financial records. Performing account reconciliations routinely can also help a business to:
Identify and correct errors in data entry.
Post adjustments for timing discrepancies with bank transactions, fees, and interest.
Ensure the accuracy and validity of financial statements produced by the business.
Detect fraud.
Comply with financial regulations.
Properly prepare for tax filings.
Accuracy and strict attention to detail are important elements of any account reconciliation. They ensure the integrity of the process and the reliability of its results.
The following steps are typically performed for each balance sheet account in the general ledger.
Following these standards, account reconciliation consists of several steps:
Determine the starting point: The first step of reconciliation is to match the beginning balance in the account to the ending balance from the prior period to identify any discrepancies.
Gather necessary data: Next, it is important to gather and prepare the necessary documentation. This entails identifying the appropriate account(s) to be reconciled and the reporting period – month, quarter or year -- to which the reconciliation will apply. Account ledgers with debits and credits for the period of review will provide the transaction details to be reconciled.
Analyze the data: Once all the documentation is prepared, the accounting team will analyze the data.
Analysis typically involves comparing the general ledger account balance with independent systems, third-party data, or other supporting documentation, such as bank and credit card statements. When discrepancies are found, accountants investigate and take appropriate corrective action, such as booking an adjusting journal entry.
Save Documents: The final stage includes retention of all documents. A controller or accounting manager will review the analysis. This step confirms the details of the reconciliation to make sure that:
all balances align.
supporting documents are provided to verify the transactions.
adjustments were appropriately made.
The account reconciliation process must be completed before a company can certify the integrity of its financial information and issue financial statements.
There are two basic types of account reconciliation:
A business can perform account reconciliation by reviewing documents. This is done by examining transactions in the business’s financial records and comparing those with source documents, such as receipts, invoices, or statements.
A business can also perform account reconciliation by doing an analytics review. This is done by performing a historical analysis and comparing this to current data. If present accounting figures are widely different from projections made from historical data, this may be a sign of irregularities.
Utilizing one of the two basic approaches described above, account reconciliations can be performed in a variety of contexts within the business:
Bank reconciliations involve the business reconciling its own financial statements with the statements it receives from its bank.
Vendor reconciliations will compare statements provided by vendors or suppliers with the business’s accounts payable ledger.
Intercompany reconciliation refers to the process of reconciling statements and transactions between units, divisions, or subsidiaries of the same parent company.
Business-specific reconciliations involve the reconciliation of accounts in a specific business unit, such as a stock inventory or expenses reconciliation.
Petty cash reconciliation refers to the process of verifying that all transactions in the petty cash fund are accurate and substantiated.
Credit card reconciliations compare purchase receipts with credit card statements provided by the card company.
Most account reconciliations are performed against the general ledger as this is considered the master source of financial records for the business.
As noted, accuracy and strict attention to detail are two of the operating principles of an account reconciliation.
During the process, discrepancies between business ledgers and outside source documents are often identified. These discrepancies may be caused by a variety of factors:
Timing Differences
There may be instances where activity that is captured in the general ledger is not present in the supporting data or vice versa, due to a difference in the timing in which the transaction is reported.
For example, while performing an account reconciliation for a cash account, it may be noted that the general ledger balance is $100,000, but the supporting documentation (i.e., a bank statement) says the bank account has a balance of $110,000.
An investigation may determine that the company wrote a check for $10,000 which has not yet cleared the bank. In this case, a $10,000 timing difference due to an outstanding check should be noted in the reconciliation.
Missing Transactions
Reconciliations may also reveal discrepancies that are a result of missing transactions.
For example, while performing an account reconciliation for a credit card receivable account, it may be noted that the general ledger balance is $180,000, but the supporting documentation (i.e., credit card processing statement) has a balance of $200,000.
Further analysis may reveal that four transactions were improperly excluded from the general ledger but were properly included in the credit card processing statement. As such, a $20,000 discrepancy due to the missing transactions should be noted in the reconciliation and an adjusting journal entry should be recorded.
Mistakes
There may be instances where a mistake or error causes a discrepancy between the general ledger and the supporting data. For example, while performing an account reconciliation for a cash account, it may be noted that the general ledger balance is $149,000, but the supporting documentation (i.e., a bank statement) says the bank account has a balance of $149,900.
An investigation may determine that the company recorded bank fees of $1,000 rather than $100. As such, a $900 error should be noted in the reconciliation and an adjusting journal entry should be recorded.