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Account Reconciliation

What Are Account Reconciliations?

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.

How is an Account Reconciliation Performed?

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:

  1. 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.

  2. 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.

  3. 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.

  4. 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.

Two Methods of Account Reconciliation

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.

Multiple Types of Account Reconciliations

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.

What Causes Reconciliation Discrepancies?

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.

FAQ

Why Is Account Reconciliation Important?

Account reconciliation is an essential business accounting function.

It helps businesses address a number of fundamental objectives in their accounting processes.

All businesses must identify errors, whether they occur in data entry, at the bank account level, because of omission, lack of information, duplication, or for some other reason.

Account reconciliation helps identify fraud. All businesses are vulnerable to unscrupulous employees, cyber-theft, and dishonest customers, vendors, or suppliers. Account reconciliation can help prevent fraudulent activity by identifying such common practices as duplicate checks, unauthorized credit card activity, or altered invoices.

Account reconciliation is an important process to ensure the validity and accuracy of all financial statements. Individual transactions are the building blocks of financial statements produced by the business. It is imperative for the business to verify all transactions before they are relied upon to produce those statements.

In the United States, account reconciliation is an essential tool to help companies comply with federal regulations applied by the Securities and Exchange Commission (SEC) under the federal Sarbanes-Oxley law. Around the world, businesses must comply with all local laws and regulations.

Finally, all business must prepare for tax filings. Account reconciliation software allows business to eliminate errors and provide accurate filings.

What Are the Two Basic Methods of Account Reconciliation?

Account reconciliation is typically done at the end of an accounting period, such as at the time of the monthly close. This ensures that transactions that are being closed out are properly verified and that the closing statements are accurate.

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 own 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 these two basic approaches, account reconciliation is performed in a variety of contexts within the business.

For example, when a business performs a bank reconciliation, it compares its own financial statements with the records that have been received from the bank. This helps catch timing delays in deposits, payments, fees, and interest that may have been recorded by one entity but not the other.

Petty cash reconciliation is the process by which the business ensures that its petty cash funds are being spent according to internal guidelines and policies, and that all transactions are being properly documented with a receipt or invoice.

Most account reconciliations are performed against the general ledger as this is considered the master source of financial records for the business.

How Do I Effectively Implement Account Reconciliations?

Many organizations approach the implementation of their software platform in a short-sighted manner. Unfortunately, it creates more challenges down the road.

Organizations that approach streamlining the financial close with a big-picture mentality realize that the very first software implementation is the most critical.

These companies address key issues in the beginning by importing all their data, fixing broken processes, identifying and addressing long-standing discrepancies, and preparing accountants for ongoing (but manageable) change.

What Are the Audit Benefits of Account Reconciliation Software?

In the modern era of digital technology, software offers many advantages in the reconciliation process:

Standardized Templates in the Cloud: Templates are designed to replace error-prone spreadsheets, allowing accountants to perform reconciliations with uniform formatting and process. Accountants can automatically roll-forward items, attach support, and eliminate formula errors. For example, an amortizable prepaid template guides the preparer to enter specific details, including the prepaid name, total amount, and to and from dates, which automatically creates an online amortization schedule.

Throughout the life of the prepaid, if the month-end GL account balance matches the expected balance in the software, the account is auto-certified.

Auto-certification is a notable benefit in BlackLine. Organizations can configure rules based on their internal policies and controls to further optimize the account reconciliation process.

This approach increases control globally and at the account level, allowing organizations to implement thresholds and set the frequencies automatically.

Accountants are freed from worrying about incomplete or messy reconciliations and can instead focus on the high-risk accounts, analysis, and adding strategic value to the organization.

Out-Of-The-Box Segregation of Duties: One of the challenges of a manual reconciliation process is accountability. With no automation around workflow and no reportability of status, it’s difficult to ensure policies are adhered to and work is being completed timely by the appropriate resources.

Accountants must manage workloads individually, set calendar reminders, and follow up with managers via email to complete reconciliations on time. Leadership must then rely on word of mouth or manual checks to ensure policies were properly followed.

Account reconciliation software, on the other hand, automatically tracks and manages assignments, workflow, status, and due dates. The system also captures a complete audit trail, so a record is always available of who prepared, approved, and reviewed a reconciliation, along with the date and time the action occurred.

Software also automatically enforces segregation of duties. The same person cannot prepare and approve a reconciliation—an essential point of control.

Substantiation & Supporting Documentation: In a manual reconciliation process, accountants can spend hours scanning and copying supporting documents, organizing papers and looking through binders and digital folders.

With a cloud platform, supporting documentation is easily stored and accessible at the item or account level, so accountants never have to go searching again. The uploading user’s name and the date and time is automatically recorded with the attachment, and no one else can edit information.

Software also makes it easier to group like accounts together, so supporting documentation can be attached once rather than duplicated for multiple accounts.

Lastly, read-only access can be granted to auditors, eliminating the need to provide supporting documentation separately. This self-service approach allows auditors to view completed reconciliations and access the support they need for testing and assessing controls on their own.

How Does Account Reconciliation Software Work?

Account reconciliation software unifies, streamlines, and automates all the steps in the account reconciliation process. It takes in data from various sources of financial information, such as ERP systems, bank files or statements, credit card processors, and merchant services.

It then compares account balances between sources and identifies any discrepancies so they can be investigated by accounting staff. This removes the burden of manually performing this task, and frees capacity for accountants to focus on analyzing discrepancies.

Account Reconciliation Software Features Include:

  • Seamless connectivity with data sources including ERPs, banks, and others.

  • Centralized tools to perform reconciliations and make adjustments as needed directly in the software.

  • Reconciliation templates and checklists to standardize processes.

  • Links to applicable policies and procedures for easy reference.

  • Integrated storage of supporting documentation for easy review and audit.

  • Automated review and approval workflows with proper segregation of duties.

What Solutions Does BlackLine Offer?

BlackLine Account Reconciliations is designed to streamline all aspects of the account reconciliation process. It adds proper controls and automation, imports data from any source, and is compatible with all major ERP systems.

Configurable validation rules allow for the auto-certification of low-risk accounts, significantly reducing the workload of accounting staff. When discrepancies do exist and require analysis, customizable templates, checklists, and integrated storage for supporting documentation ensure that reconciliation processes are standardized across the organization.

BlackLine Transaction Matching further automates processes by enabling the comparison and validation of transaction-level account data. This allows accountants to view the exact transactions that are not matching in various systems and statements, decreasing the time spent locating discrepancies. This is particularly useful for high-volume reconciliations, such as credit card reconciliations.

Finally, when correcting journal entries are required, the BlackLine Journal Entry product automates this portion of the process as well.