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Account Reconciliation

What Is Account Reconciliation?

Account reconciliation is the process by which the information in an account is confirmed to be correct and accurate.

Reconciliation is the process of comparing two different references to the same financial transactions. Account reconciliation is the application of that process to the financial information in a particular business account.

To reconcile account transactions, accountants will compare the details of transactions to documents provided by an outside source, like a bank or vendor. These include such documents as invoices, receipts, and transaction statements.

Account reconciliation is an important process that ensures the validity of the business’s financial records. It has many benefits and can help a business:

  • Catch errors in data entry

  • Correct 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 Account Reconciliation Performed?

Account reconciliation is comprised of a number of steps and processes.

The first phase of reconciliation is to match the beginning balance in the account to the ending balance from the prior period to identify any discrepancies.

Next, gather and prepare the necessary documentation. This entails identifying the appropriate account(s) to be reconciled and the time period for which the reconciliation will apply. Account ledgers with debits and credits for the period of review will provide the transaction details to be reconciled.

Once all the documentation is prepared, the accounting team will analyze the data. This will involve reviewing all debits and credits, substantiating them against outside documentation, and making all necessary adjustments.

The final stage includes retention of all documents. A controller or accounting manager will review the analysis. This analysis confirms the details of the reconciliation to make sure that all balances are in agreement, supporting documents are provided to verify the transactions, and all adjustments were appropriately made.

What Are the Different Types of Reconciliation?

Account reconciliation is performed in a number of different ways:

  • Bank reconciliation involves the business reconciling its own financial statements with the statements it receives from the bank.

  • A vendor reconciliation will compare statements provided by the vendor or supplier with the business’s own accounts payable ledger.

  • Intercompany reconciliation is the process of reconciling statements and transactions between units, divisions, or subsidiaries of the same parent company.

  • Business specific reconciliation involves the reconciliation of accounts in a specific business unit, such as a stock inventory or expenses reconciliation.

  • Petty cash reconciliation is the process of verifying that all transactions in the petty cash fund are accurate and substantiated.

Credit card reconciliation compares purchase receipts with credit card statements provided by the card company.

FAQ

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.

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.