What is Reconciliation in Accounting? Types of Reconciliation

Did you know there’s more than one way to reconcile your accounting records? But for all methods, if you’re not using reconciliation software, the first step will likely be importing account transactions from your ERP or accounting software into an Excel spreadsheet. 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. Auditors will always include reconciliation reports as part of their PBC requests. Access the internal source of data being reviewed (i.e. the bank ledger account on your accounting software) and compare it against the external document it is being compared against (i.e. bank statement).

When an account is reconciled, the statement’s transactions should match the account holder’s records. For a checking account, it is important to factor in any outstanding checks or pending deposits. Another way of performing a reconciliation is via the account conversion method. Here, records such as receipts or canceled checks are simply compared with the entries in the general ledger, in a manner similar to personal accounting reconciliations. Nowadays, many companies use specialized accounting software in bank reconciliation to reduce the amount of work and adjustments required and to enable real-time updates.

To verify the general ledger account for each type of prepaid asset, check the balances of prepaid assets for the beginning balance plus any transaction additions minus time passage reductions to equal the ending balance. The allowance for obsolescence and the inventory valuation at lower of cost or market are reconciling items to consider in the inventory recording and reconciliation processes. While the entries in the general ledger are based on the facts of the moment, they may not always be accurate.

By reconciling financial records, such as bank statements, invoices, and receipts, businesses can identify discrepancies and irregularities and protect themselves against potential fraud. This saves your company from paying overdraft fees, keeps transactions error-free, and helps catch improper spending and issues such as embezzlement before they get out of control. Some businesses create a bank reconciliation statement to document that they regularly reconcile accounts.

But for high-volume accounts — like cash in a busy organization— you may be looking at thousands of transactions. Doing that work manually is tedious and time-consuming to say the least, and it’s easy to make mistakes. Adding to the challenge, some transactions may be split on one side but not the other.

Regular account reconciliation should be combined with invoice reconciliation as part of your internal controls in accounts payable. Keeping your accounts reconciled is the best way to make sure that your balances are accurate and an important part of ensuring adequate financial controls are in place. While the reconciliation process remains the same, with two sets of documents compared for accuracy, the difference lies in what is being reconciled. While reconciling your bank statement, you notice the bank debited your account twice for $2,000 in error. 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.

This process is important because it ensures that you can identify any unusual transactions caused by fraud or accounting errors. As a business, the practice can also help you manage your cash flow and spot any inefficiencies. 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. Reconciliation in accounting—the process of comparing sets of records to check that they’re correct and in agreement—is essential for ensuring the accuracy of financial records for all kinds of businesses.

When you receive a check from a customer, you may have recorded it as paid. But there are chances that the check could have bounced due to numerous reasons. Or the payment you made to supplier A went into the accounts of supplier B due to a clerical error. Before we get into the account reconciliation process, let’s back up and think about the who, what, and when of the reconciliation workflow.

Reasons to Reconcile Bank Statements

Make sure that you verify every transaction individually; if the amounts do not exactly match, those differences will need further investigation. For small businesses, the main goal of reconciling your bank statement is to ensure that the recorded balance of your business and the recorded balance of the bank match up. In the world of accounting, reconciliation is not just a term; it is an essential tool for ensuring accuracy, maintaining financial health, and fostering trust. By systematically reconciling accounts, businesses can ensure they are working with the most accurate, up-to-date financial information. This process helps detect any anomalies or discrepancies early, allowing for timely rectification.

This is how the account balances for these kinds of accounts are reconciled. A bank reconciliation Excel template can help you make short work of this process. If it doesn’t, you’ll have to go back in time or check the audit trail to find the transaction or transactions that changed. But even if you’re not subject to Sarbanes-Oxley, reconciling accounts — especially cash accounts— on a timely basis can help prevent fraud. We’ve all heard of small businesses that lose tens of thousands, even hundreds of thousands, to embezzlement. Many of those thefts could have been halted in their tracks immediately if the bank accounts had been reconciled regularly.

Check Incoming Funds

This is true for both those within a company and those looking in from the outside. However, in reality, there are often still discrepancies due to timing issues related to transactions (i.e. cash in transit) or errors from external providers (i.e. omitted transactions). Intercompany reconciliations are undertaken by companies which are part of a wider group.

1. There are several steps involved in the account reconciliation process, depending on the accounts that you’re reconciling.
2. That’s why account reconciliation remains a key component of the financial close process.
3. You’ll also have an external bank account that tracks deposits, purchases, and long-term balances.
4. Note charges on your bank statement that you haven’t captured in your internal records.
5. The process looks for mismatches both within and between any of the subsidiaries.

Incorporating these strategies into your reconciliation process not only simplifies the task but also enhances the accuracy and efficiency of your financial management. Integration with accounting software like NetSuite, QuickBooks, Xero, or Sage, especially when paired with Ramp, can be a significant step toward streamlining your financial operations. Inventory reconciliation makes sure that physical inventory counts align with your general ledger. It accounts for transactions related to inventory and accounts payable and reconciles discrepancies. Additionally, it considers factors like the allowance for obsolescence and inventory valuation. Analyzing capital accounts by transaction, this reconciliation includes beginning balances, additions, subtractions, and adjustments to match general ledger ending balances for capital accounts.

Larger businesses with several branches may also need to complete intercompany reconciliations. Depending on your business, you may also want to reconcile your inventory account, which is typically completed by doing a complete accounting of all inventory on hand. Balance sheets and profit and loss statements are both essential resources for determining the financial health of your business. For example, when you pay your utility bill, you would https://accountingcoaching.online/ debit your utility expense account, which increases the balance and credit your bank account, which decreases the balance. The charge would have remained, and your bank balance would have been $2,000 less than the balance in your general ledger. Real-time automated payment reconciliation reports are generated to reconcile with the general ledger when batch payment runs are completed using AP automation and global mass payments software.

How Ramp helped Viking Well Service institute a more efficient expense management process

Although a single-entity small business doesn’t need to consolidate the financial statements of multiple entities, companies engaging in M&A will need to complete a consolidation. Accountants’ consolidation processes may use automated ERP software functionality to combine results and remove intercompany transactions or use spreadsheets. Prepaid assets are prepaid expenses that are capitalized as an asset when paid in cash.

Compare Both Records Side-by-Side

Rectifying the bank errors bring the bank statement balance and the cash book balance into an agreement. Documentation review is the most commonly used understanding depreciation and balance sheet accounting account reconciliation method. It involves calling up the account detail in the statements and reviewing the appropriateness of each transaction.

This step may not be necessary for smaller businesses with limited activity. But if you’re processing a lot of transactions, it can be an eye-opening experience to review a comparative trial balance. The reconciliation process is necessary if you use manual ledger accounting to ensure that general ledger balances are accurate.

How often should you conduct the three-way reconciliation accounting process? As noted earlier, your state may have specific requirements for how often you must conduct three-way reconciliation—such as monthly or quarterly. In this method, estimates of historical account activity levels and other metrics are used.