Account reconciliation is the process of comparing general ledger accounts for the balance sheet with supporting documents like bank statements, sub-ledgers, and other underlying transaction details. If the ending balances don’t match, accountants investigate the cause of the discrepancies and make adjusting entries required to resolve differences from errors or missing transactions. According to a survey conducted by the Association of Certified Fraud Examiners (ACFE), financial statement fraud constituted 9% of all reported fraud cases in 2022. This highlights the significance of accurate accounting reconciliation in detecting and preventing fraudulent activities within an organization.

The process of account reconciliation is all about creating a more robust and reliable financial foundation for your business. The trial balance that lists and totals general ledger account balances should have equal debit and credit totals to reflect double-entry accounting and posting of all accounts to the general ledger. forms and publications Fixed assets should be rolled forward by ensuring that purchases, sales, retirements and disposals, and accumulated depreciation are correctly recorded. In financial records, like the general ledger and trial balance, fixed assets have a debit balance, and accumulated depreciation has a credit balance to offset fixed assets.

Be sure recurring journal entries and reversing entries have been completed. The two outstanding checks will not have to be recorded as a journal entry, since the adjustment is on the bank’s side. However, any adjustments on the general ledger side will have to be entered.

What is the Account Reconciliation Process?

For example, if you are reconciling the trade accounts receivable account, the balance in the account should exactly match the total of the open accounts receivable report. An account reconciliation is usually done for all asset, liability, and equity accounts, since their account balances may continue on for many years. It is less common to reconcile a revenue or expense account, since the account balances are flushed out at the end of each fiscal year. However, this may be done simply to verify that transactions were recorded in the correct account; a reconciliation may reveal that a transaction should be shifted into a different account. An example of reconciliation in accounting is comparing the general ledger to sub-ledgers, such as accounts payable or accounts receivable.

• Make a list of all transactions in the bank statement that are not supported, i.e., are not supported by any evidence such as a payment receipt.
• Perhaps the Excel spreadsheet you used to calculate the journal entry has a formula error.
• Once the errors have been identified, the bank should be notified to correct the error on their end and generate an adjusted bank statement.
• Auditors will always include reconciliation reports as part of their PBC requests.
• Using a schedule of general ledger accounts, analyze capital accounts by transaction for any additions or subtractions.

Bank reconciliation statements confirm that payments have been processed and cash collections have been deposited into a bank account. Balance sheet reconciliation involves comparing the balances of internal accounts against corresponding external documents. It’s a bit like our earlier example with the bank statement, but this process is broader. Balance sheet account reconciliation can cover everything from cash and investments to liabilities and shareholders’ equity (any accounts found on the balance sheet). Customer reconciliation is also known as accounts receivable reconciliation. This type of reconciliation is used by businesses to reconcile the balances of bills and invoices of customers, which are yet to be paid by the customers and hence yet to be received by the business.

But, if there are discrepancies due to pending charges or interest fees, reconciling accounts helps identify and correct the amounts owing, ensuring the company’s records match the external document. Any balance sheet accounts that have statements provided by sources external to the company, should be reconciled every month. This includes bank statements, credit card statements, loan statements, and investment account statements. The purpose of account reconciliation for balance sheet accounts is to ensure that financial statements are materially accurate and internal control is working to prevent fraud and errors. Account reconciliation is considered part of the full accounting cycle process.

using appropriate metrics. For example, if a company maintains a consistent

That’s why account reconciliation remains a key component of the financial close process. Accounts receivable is the amount that your customers owe you for the goods sold or services provided. You will need to give special importance to reconciling accounts receivables to ensure steady cash flow and good customer relations to name just a few reasons. You will need to check the bank and ledger balances to ensure that there are no short payments, deductions, disputes, and to stop credit facility for defaulting customers. Accounts receivable details may not match the general ledger if customer invoices and credits are accrued and not entered individually into the aged accounts receivable journal. Customer account write-offs must be recorded against the Allowance for Doubtful Accounts, which nets against Accounts Receivable in financial statements.

A bank error is an incorrect debit or credit on the bank statement of a check or deposit recorded in the wrong account. Bank errors are infrequent, but the company should contact the bank immediately to report the errors. The correction will appear in the future bank statement, but an adjustment is required in the current period’s bank reconciliation to reconcile the discrepancy. The reconciliation process includes reconciling your bank account statements, but it also includes a review of other accounts and transactions that need to be completed regularly. Account reconciliation is particularly useful for explaining any differences between two financial records or account balances.

Account reconciliation best practices

One reason is that your liability for fraudulent transactions can depend on how promptly you report them to your bank. Reconciliation is an accounting procedure that compares two sets of records to check that the figures are correct and in agreement. Reconciliation also confirms that accounts in a general ledger are consistent and complete.

What Is the Difference Between Account Reconciliation and Financial Reconciliation?

Account reconciliation aids in financial reconciliation, ensuring that the numbers reported on the financial statements reflect the company’s true financial position. This process helps businesses identify discrepancies or anomalies that could indicate error or fraud. As a result, companies can act swiftly to rectify these issues, protecting their financial health and integrity. The process of account reconciliation provides businesses with the opportunity to notify the bank (or other external source of statements) of errors and have them corrected. This is critical because any discrepancies left unaddressed could distort a company’s understanding of its financial health. Financial statements should also be compared with general ledger balances for agreement in amount.

Your Business!

It may seem obvious, but this is essential for making sure the accounting records are right. That’s how we know the financials are accurate — or at least materially correct — every month. If you use double-entry accounting in your business, you need to do account reconciliations monthly. The most important account reconciliation your business can perform is the bank reconciliation. Using a double-entry accounting system, as shown below, she credits cash for $2,000 and debits her assets, which is the equipment, by the same amount.

Fortunately, today’s accountants have the advantage of automation and reconciliation tools like account reconciliation software that can make short work of the time-consuming chore of transaction matching. Most accounting systems and ERPs have built-in modules that can import bank transactions and compare them to the transactions in the system. One of the most important things you can do to keep your general ledger accurate is to perform a bank reconciliation monthly. Take my word for it, you don’t want to skip this process, even for a single month. There are several steps involved in the account reconciliation process, depending on the accounts that you’re reconciling.

Starting with the ending balance of the prior period, you add all the increases and subtract all the decreases to get to the ending balance. No matter how diligent the accounting team is, sometimes a transaction just slips through the cracks. Emma’s 70-person geographically distributed accounting team improved internal controls and streamlined the audit thanks to FloQast.