How to Properly Reconcile Accounts Receivable

Accounts receivable represents the money owed to a business by its customers for goods or services delivered on credit. It is a significant asset on a company’s balance sheet, reflecting future cash inflows. Accounts receivable reconciliation is the systematic process of ensuring that the total balance shown in the general ledger’s accounts receivable account precisely matches the sum of all individual customer balances.

This reconciliation ensures the integrity of financial records and provides an accurate picture of what customers owe. An accurate accounts receivable balance is fundamental for effective financial management, aiding cash flow forecasting and working capital management. Maintaining precision in these records facilitates timely collection efforts and supports sound business decision-making.

Gathering Essential Data and Reports

Before initiating the reconciliation process, gather specific financial documents and reports. These provide the foundational data points required for comparison and investigation, streamlining the effort.

The accounts receivable aging report is a primary document. This report lists all outstanding invoices, categorizing them by how long they have been overdue, often in 30-day increments (e.g., 1-30 days, 31-60 days). It includes details like customer name, invoice number, original invoice date, due date, and outstanding amount. This report provides the detailed breakdown of individual customer balances.

The balance from the general ledger’s accounts receivable account is another key piece of data. This account serves as the control account, summarizing the total amount owed by all customers at a specific point in time. This summary balance can be obtained from a trial balance or directly from the general ledger system.

Recent cash receipts journals or bank statements are important for identifying payments not yet applied to specific invoices. These records document incoming payments from customers and can highlight unapplied cash that could contribute to discrepancies. Other documents like sales invoices, credit memos, and customer payment remittances might be needed for detailed investigation if discrepancies arise.

Step-by-Step Reconciliation Procedure

Once all necessary data and reports are assembled, the reconciliation process begins. This involves a direct comparison of the summarized general ledger balance with the detailed customer balances. Following a clear sequence of steps helps in identifying any discrepancies.

First, obtain the ending balance from the general ledger’s accounts receivable account for the specific period. This figure represents the company’s consolidated record of what is owed by customers. Ensure this balance is pulled as of the exact reconciliation date.

Next, calculate the total from the accounts receivable aging report. This involves summing all outstanding balances for every customer listed on the report as of the same reconciliation date. This figure represents the sum of individual customer debts.

Then, compare these two totals: the general ledger balance and the summed total from the AR aging report. If these amounts match, the accounts receivable is reconciled for that period, confirming that detailed customer records support the summary balance.

If the totals do not match, this signals a discrepancy requiring further investigation. The difference between the general ledger balance and the aging report total indicates the amount that needs to be accounted for. At this stage, the focus is on identifying the existence of a difference.

To narrow down potential issues, review recent transactions posted near the reconciliation date. Examine both general ledger entries and individual customer ledgers for transactions around the cutoff date. Simple timing differences, such as a payment recorded in the general ledger but not yet applied to an invoice, are common initial findings.

Investigating and Resolving Discrepancies

When the accounts receivable general ledger balance does not align with the total from the aging report, a systematic investigation is required to pinpoint the root cause. Several common factors can lead to these imbalances.

One frequent cause of discrepancies is timing differences. For example, a customer payment might be recorded in the general ledger cash account but not yet posted to the customer’s account in the accounts receivable subsidiary ledger. Conversely, an invoice might be issued and recorded in the subsidiary ledger but not yet formally posted to the general ledger. These temporary mismatches often resolve themselves with the next processing cycle.

Data entry errors are another common source of imbalances. These can include incorrect invoice amounts, applying a customer payment to the wrong account, or accidentally creating duplicate entries. Unapplied cash or credits also contribute when payments are received without clear remittance advice, preventing their application to specific outstanding invoices.

Missing invoices or credit memos can also create differences. If a sales invoice was issued but never recorded in the general ledger, the general ledger balance will be understated. Similarly, a credit memo not properly recorded in both systems would lead to an imbalance.

To investigate, trace transactions by reviewing individual customer ledgers against the general ledger for specific dates, particularly around the reconciliation period. Check for unposted batches or transactions in the accounting system. Compare bank deposits to cash receipts records to verify incoming payments. Sometimes, direct communication with customers is needed to clarify payment details or resolve disputes.

Once the specific cause of a discrepancy is identified, an adjusting journal entry is often necessary to correct the general ledger balance or the subsidiary ledger. For instance, an entry might record a missing invoice, apply previously unapplied cash, or correct a data entry error. Document all adjustments, detailing the reason for the change, the accounts affected, and the date. After all identified discrepancies are resolved, re-compare the general ledger balance and the accounts receivable aging sum to confirm the reconciliation is complete.