How to Do Account Reconciliation: A Step-by-Step Process

Account reconciliation is an important practice in financial management. It involves comparing internal financial records, such as a company’s ledger, with external statements from financial institutions. This process confirms transactions are correctly recorded and identifies discrepancies. Regular reconciliation maintains reliable financial data for informed decision-making and financial health.

Accounts Requiring Reconciliation

Financial accounts commonly require reconciliation. Bank accounts, including checking and savings, are frequently reconciled to match the organization’s internal cash ledger balance with the balance reported by the bank. This helps identify unrecorded transactions or errors.

Credit card accounts also require regular reconciliation, comparing internal spending records against monthly statements. This ensures charges and payments are accurate and helps prevent unauthorized transactions. Accounts receivable reconciliation involves matching customer payments against outstanding invoices, confirming revenue is credited and balances are correct.

Accounts payable reconciliation aligns vendor invoices and payments with internal records of amounts owed. This ensures liabilities are accurate and payments are correct. Payroll accounts also benefit from reconciliation, comparing disbursements and tax withholdings with internal records to verify correct employee payments and tax obligations.

Preparing for Reconciliation

Before initiating reconciliation, gather specific documents and establish key parameters. Primary documents include the external financial statement (bank or credit card) for a specific period, providing an independent view of transactions.

The corresponding internal general ledger or cash ledger report from the accounting system is also required, detailing all transactions as recorded by the organization. If applicable, the previous month’s reconciliation report provides the starting reconciled balance.

Define the reconciliation period, usually a calendar month. Identify the correct beginning balance, which should align with the prior period’s ending reconciled balance or the ledger’s opening balance. Organize all these documents before beginning the comparison.

Step-by-Step Reconciliation Process

With all necessary documents prepared, reconciliation begins by comparing internal ledger entries to the external financial statement. Each transaction is matched item by item between the two records. As items are confirmed to be identical, they are typically marked or “ticked off” on both the ledger and the statement. This helps identify unmatched entries.

After matching all common transactions, identify items present on the external statement but not yet recorded in the internal ledger. These “unrecorded items” often include bank service charges, interest earned on deposits, or automated payments and direct deposits. Note these items for subsequent adjustment in the company’s accounting records.

Conversely, identify items recorded in the internal ledger that have not yet appeared on the external statement. These are commonly referred to as “outstanding items” or “timing differences.” Examples include checks issued that have not yet cleared the bank or deposits in transit. Note these outstanding items, as they explain the difference between the bank’s reported balance and the ledger’s balance.

Next, calculate the reconciled balance, which brings both external and internal records to a common, adjusted figure. Begin with the bank statement balance, then add deposits in transit and subtract outstanding checks. This yields an adjusted bank balance. Similarly, the internal ledger balance is adjusted by adding interest earned and subtracting bank service charges or other unrecorded items.

The final step confirms the adjusted bank balance matches the adjusted ledger balance. When these two figures align, it signifies a successful reconciliation, indicating that financial records accurately reflect the organization’s cash position.

Addressing Discrepancies

If reconciled balances do not match after comparison and adjustment, a systematic investigation is required. Common reasons for imbalances include data entry errors (e.g., transposing digits, incorrect amounts), omitted transactions, or duplicate entries.

Discrepancies can also stem from bank errors or arithmetic mistakes made during the reconciliation process. To find the error, re-check all calculations performed during the adjustment phase. Then, carefully review all unmatched items, ensuring they were correctly categorized as either unrecorded or outstanding.

A closer comparison of individual transactions, particularly those with similar amounts or dates, can reveal transpositions or decimal errors. Once identified, corrective entries must be made in accounting records to align the ledger balance with the reconciled bank balance. This might involve posting a journal entry to adjust a cash or expense account.

Documenting these adjustments is important, detailing the nature of the error and the corrective action taken. After resolution, document the completed reconciliation. This documentation should be filed for future reference, supporting audits or internal reviews.