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The A to Z guide to reconciliation in accounting

Posted by Neha De

February 15, 2022

Reconciliation is a standard accounting procedure that small business owners or their accountants undertake, usually at the end of an accounting period, to ensure that the general ledger account balance is accurate and complete.

In order to substantiate the balance mentioned in the general ledger, the process of accounts reconciliation involves comparing two pieces of data: one created internally and the second by a third party such as a supplier, bank, client or customer.

Benefits of account reconciliation for a business

Reconciliation is a fundamental accounting process that ensures the actual money earned or spent matches the money entering or leaving an account at the end of a fiscal period.

The process of account reconciliation is essential for ensuring the accuracy and completeness of financial statements. Reconciling the balance sheet accounts allows businesses to identify and record necessary adjustments to the general ledger in a timely manner.

Account reconciliation also allows business owners and their finance teams to be sure that their financial information is accurate, reliable and allows for the chance to identify any discrepancies or mistakes that may occur. This is the first step in a company’s financial close process.

Comparing balances and transactions is essential for a business because it helps catch fraudulent or overcharged credit card transactions, avoid overdrafts on cash accounts, describe timing differences and highlight any suspicious activity (such as incorrectly recorded income and expense transactions or theft). This allows organizations to keep transactions error-free, avoid paying overdraft fees and highlight irregular spending and such issues as embezzlement in a timely manner.

Types of reconciliation

Let us explore the five main types of account reconciliation.

1. Bank reconciliation

– The most common type of account reconciliation, the process of bank reconciliation involves companies reconciling their cash position by comparing the values of their monthly bank statements to those of their recorded bank transactions in their accounting ledgers or software.

2. Vendor reconciliation

– The process of vendor reconciliation compares transactions within the payable ledger and its overall balance to the balance owed on supplier provided statements.

Note: Businesses may need to periodically request for supplier statements in order to reconcile these accounts, as they are typically not provided automatically.

3. Customer reconciliation

– Customer reconciliations are carried out by organizations that offer credit terms to their customers or clients. This type of reconciliation examines whether there are any inconsistencies with the related transactions by weighing up the details of the accounts receivable ledger (which records all related invoices and payment individually) against the receivables control account (which is a summary of receivables transactions as against the recognition of them individually) in the general ledger.

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4. Intercompany reconciliation

– Intercompany reconciliation is performed by firms that are part of a wider organization. Performing this type of reconciliation allows the parent company to put together accurate consolidated accounts.

Here, the booked value of what is owned/owed by one organization is compared with the balance of its counterpart. These are typically cash transactions (that is, one firm lending money to another) or one company declaring dividends to another in the same group.

The reconciliation is considered successful if the same balance shows up in the accounts of both firms (one as a debtor and the other as a creditor). This practice ensures that the consolidated accounts remove any made-up profit/loss from intercompany transactions.

5. Business-specific reconciliation

– Business-specific reconciliations are unique and relate to the specifics of individual businesses. For instance, the cost of goods reconciliation is required to be carried out by any company that has any form of inventory. Essentially, they need to prepare a business-specific reconciliation statement to match balances on the cost of goods sold account, which can be calculated using either of the following two methods:

Cost of goods sold = opening inventory + purchases – closing inventory

Or,

Cost of goods sold = sale – profit

Both of these methods should arrive at the same figure. If not, records should be investigated to find out reasons for any discrepancies.

Steps in account reconciliation

Check out this five-step process of conducting an account reconciliation:

Step 1: Check the bank statement against the cash book statement.

Compare all transactions recorded in the cash book with those appearing in the bank statement. Compile a list of all transactions in the bank statement that are not supported by any evidence, such as a payment receipt.

Step 2: Identify all payments recorded in the cash book that do not appear in the bank account statement, and

vice-versa

. Any transactions, such as checks and ATM transactions, should be deducted from the bank statement balance. Make a note of transactions that appear in the bank statement but are missing from the cash book. Transactions that are likely to be overlooked are check printing fees, ATM service charges, uncleared checks and overdrafts.

Step 3: Check transactions that appear in both the bank statement and the cash book.

Look for account credits and direct deposits that appear in the cash book but not in the bank statement. Next, add these to the bank statement balance.

Similarly, for deposits appearing in the bank statement but not in the cash book, add such entries to the cash book balance.

Step 4: Analyze the bank statement for mistakes.

A bank error is an erroneous debit or credit on the bank statement of a deposit or check recorded in the wrong account. Such errors are not common, but should be checked and, if found, reported to the bank. In order to reconcile the discrepancy, the correction will appear in a future bank statement, however, an adjustment needs to be made in the current period's bank reconciliation.

Step 5: Ensure that the balances match.

After identifying the evidence for all mismatches between the bank statement and the cash book, ensure that the balances in both statements are equal. Draw up a bank reconciliation statement explaining the difference between the business’ internal records and the bank account.

Conclusion

The purpose of reconciliation is to ensure that accounting records are accurate by detecting bookkeeping errors and fraud. Some differences may be expected due to the timing of payments and deposits, but any unexplained differences may indicate theft or misuse of funds.

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Accounting

The A to Z guide to reconciliation in accounting

Benefits of account reconciliation for a business

Types of reconciliation

1. Bank reconciliation

2. Vendor reconciliation

3. Customer reconciliation

4. Intercompany reconciliation

5. Business-specific reconciliation

Steps in account reconciliation

Step 1: Check the bank statement against the cash book statement.

Step 2: Identify all payments recorded in the cash book that do not appear in the bank account statement, and

vice-versa

Step 3: Check transactions that appear in both the bank statement and the cash book.

Step 4: Analyze the bank statement for mistakes.

Step 5: Ensure that the balances match.

Conclusion

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