How to Do Reconciliation for Your Financial Accounts

Financial reconciliation is a process that involves comparing two independent sets of financial data to ensure their accuracy and completeness. This practice confirms that all transactions are recorded correctly and that financial records reflect the true state of finances. For both individuals and small businesses, reconciliation is a fundamental step in maintaining financial health. By systematically reviewing and matching financial information, it helps detect errors, identify unrecorded transactions, and prevent potential fraud, building confidence in financial statements and overall financial position.

Understanding the Basics of Reconciliation

Reconciliation operates on the principle of matching corresponding entries between two distinct financial records. This comparison helps verify that all transactions processed by an external party align with what is recorded internally. Common accounts requiring regular reconciliation include checking accounts, savings accounts, credit card accounts, and even petty cash.

For a checking account, reconciliation involves comparing the bank statement, which is the external record of transactions, with an internal ledger or checkbook register. Similarly, credit card reconciliation means matching the credit card statement against personal spending records or business expense logs. During this process, certain terms frequently appear: “outstanding items” refer to transactions recorded in your ledger but not yet processed by the bank. “Deposits in transit” are deposits you have recorded but that have not yet appeared on your bank statement. “Unpresented checks” are checks you have written but not yet cashed or cleared by your bank.

Gathering Your Financial Records

Before beginning the reconciliation process, collect all necessary financial documents. For a bank account, you will need your most recent bank statement and your personal or business internal ledger (checkbook register or accounting software).

Additionally, gather any receipts, invoices, or other transaction records that may not yet be entered into your internal ledger. Ensuring that all your internal records are completely up-to-date before starting the comparison process will streamline reconciliation.

Step-by-Step Reconciliation Process

The core of reconciliation involves a systematic comparison of your internal records with external statements. Begin by comparing all deposits listed on your bank statement with the deposits recorded in your ledger. As you find matching items, mark them off in both records to indicate they have been reconciled.

Next, review all withdrawals and payments (checks, debit card transactions, electronic transfers) on your bank statement against those in your ledger. Mark off each corresponding item.

After matching known transactions, identify any items on the bank statement not present in your ledger. These often include bank-initiated items like service fees, interest earned, or direct debits/credits. Add these transactions to your internal ledger.

Then, identify any transactions in your ledger not yet on your bank statement. These typically consist of outstanding items, such as uncashed checks or deposits in transit. Account for these timing differences.

Finally, calculate the reconciled balance for both your bank statement and your ledger. Adjust your bank statement balance by adding deposits in transit and subtracting outstanding checks. Your ledger balance should be adjusted by adding any interest earned and subtracting bank fees. If all steps are performed correctly, both adjusted balances should match, confirming accuracy.

Identifying and Resolving Discrepancies

Even with careful reconciliation, the adjusted bank balance may not match your ledger, indicating a discrepancy. Common reasons for these imbalances include transcription errors, such as entering an incorrect amount or date, or mistyping a figure. Transactions might be completely missing from your records, or conversely, entered twice. Less common are bank errors.

To resolve issues, first double-check all your calculations, especially additions and subtractions, as simple math errors are a frequent cause of imbalance. Review all items you marked off during the comparison phase to ensure that only truly matching transactions were identified. Then, examine all unmarked items (outstanding and bank-initiated) for accuracy.

If a discrepancy persists, trace individual transactions starting from the last successful reconciliation point to pinpoint the exact source of the error. Once an error is identified, make the necessary corrections in your ledger; this might involve adjusting an amount, adding a missing transaction, or voiding a duplicate entry. For suspected bank errors, contact your financial institution with documentation. Banks have processes for investigating and correcting such errors.