Accounting reconciliation: What it is and how its done

Reconcile general ledger accounts to sub-ledgers or create a schedule of underlying transactions and list discrepancies by item (which may require recording or journal entry adjustments). The reconciliation revenue definition accounting spreadsheet should be carried forward from month to month for each yearly accounting period. The cash account is reconciled to bank statements rather than a subsidiary journal (sub-ledger) for that account.

  • Automated reconciliation tools make this task much easier and faster by automatically matching data from one or more accounting systems.
  • Similarly, when a business receives an invoice, it credits the amount of the invoice to accounts payable (on the balance sheet) and debits an expense (on the income statement) for the same amount.
  • Financial statements should also be compared with general ledger balances for agreement in amount.

Account reconciliation software presents you with integrated cloud storage for supporting documentation, which boycotts the need to import documents and aids the review and audit process. This software also provides links to applied policies and procedures for easy reference and allows you to take the necessary rectification actions from within it. Different automation software, which uses statistical models to provide mostly accurate estimations for this method, is available on the internet. Accounting errors are noted where there is a significant variation from the estimated projection. Investigating discrepancies helps to pinpoint the exact cause or nature of inconsistent balances and, consequently, determine the necessary actions to take.

What Are The Benefits Of Account Reconciliation?

Infrequent reconciliations make it difficult to address problems with fraud or errors when they first arise, as the needed information may not be readily available. Also, when transactions aren’t recorded promptly and bank fees and charges are applied, it can cause mismatches in the company’s accounting records. A bank reconciliation statement can help you identify differences between your company’s bank and book balances. Since 2006, when Sarbanes-Oxley became effective, public companies have been required to have internal controls that are adequate to prevent material misstatement. Performing regular balance sheet account reconciliations and reviewing those reconciliations is one form of internal control.

  • 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.
  • In a general sense, it demonstrates that balancing the books gets taken seriously.
  • You’re matching numbers, finding discrepancies, and ensuring everything makes sense.
  • 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.
  • Not producing a reconciliation report when one is needed will also make it more time consuming to produce future reconciliations, due to it being harder to unpick the differences.

Go through all transactions entered into internal records and compare them against similar transactions appearing in the bank statement. Check off transactions that are in agreement, and make a list of transactions in the bank statement that are not supported by any evidence, such as a payment receipt. Update the internal data source being reconciled to record all new transactions (i.e. payments, issue of new invoices, bank charges and interest received) from the external document. The reconciliation has been successful if the same balance appears in the accounts of both companies, with it being a debtor in one company’s books and a creditor in the other’s.

Psst…There’s a Better Way to Put Money Back

Adding to the challenge, sometimes an entry in the general ledger may correspond to two or more entries in a bank statement, or vice versa. So, it’s time to fully embrace account reconciliation in your business operations. With this guide in your toolkit, you’re well-equipped to navigate this process.

FAQs on Reconciliation

As important as account reconciliation is in accounting, there is not much focus on it in accounting classes. In fact, many accountants can enjoy a successful career without having to perform a single account reconciliation. Supplier statements are not provided automatically so may need to be requested periodically in order to reconcile these accounts. This is true for both those within a company and those looking in from the outside.

Errors

This procedure ensures that the business’s internal records align with external data. Auditors review, analyze, and test client-prepared account reconciliations during the annual audit of the financial statements, trial balance, general ledger, and records. This means that the business can conduct the relevant reconciliation based on its needs and type of business.

Using a Double-Entry Accounting System

Where discrepancies arise, it helps you pinpoint the exact missing transaction and the accounting officer in charge of it. Account reconciliation is a key accounting process for businesses of all sizes. Reconciling an account is an important skill that every accountant and business owner should possess. Simply knowing how to properly reconcile an account can prove essential to your financial health as it ensures your financial records are always accurate.

Investigate Discrepancies

This type of reconciliation also helps minimize currency and financial costs and helps reduce bank transaction fees and optimize the company’s liquidity. Any errors and discrepancies found can be corrected to ensure that the company’s consolidated financial statements are accurate and represent the correct financial picture. If any transaction has been missed in the records of either of the companies, that can be recorded too. 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. These bills and invoices are matched to the individual balances owed by each customer against each invoice and then the overall balance of accounts receivable. It helps keep a proper track of outstanding amounts owed by the customers and further helps the business correct any errors or inaccuracies in customer accounts before the financial statements are published.

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