What Is Reconciling Accounts and How to Do It?

Account reconciliation compares internal financial records with external statements from a financial institution. This process ensures the accuracy and completeness of financial data by verifying all transactions are correctly recorded. It serves as a control mechanism, helping individuals and businesses identify discrepancies between their records and those of their bank or credit card company. This routine procedure is fundamental for reliable financial reporting and effective cash management.

Preparing for Reconciliation

Before reconciliation, gather all necessary financial documents. This includes internal records like a checkbook register, general ledger, or accounting software transaction logs. Simultaneously, obtain external statements, such as monthly bank, credit card, or loan statements, for the specific period. These external documents provide an independent record of transactions processed by the financial institution.

Ensure all internal records are current up to the statement date. All checks written, deposits made, and electronic transactions initiated should be recorded in your internal system. For instance, if reconciling a bank account, confirm the prior month’s ending balance matches the current statement’s starting balance. Having these documents organized streamlines the process.

The Reconciliation Steps

With documents prepared, systematically compare each transaction in your internal records against the external statement. Cross-reference all deposits from your internal ledger with those on the bank statement, ticking off matching entries. Next, compare all withdrawals, including checks, debit card purchases, ACH transfers, and online bill payments, against the debits on the statement. Mark off each matching item in both sets of records.

Identify transactions on the external statement not yet recorded internally, such as bank service charges, interest earned, direct deposits, or automated payments. Conversely, note any internal transactions not on the external statement, like uncashed checks or recent deposits not yet cleared. These unmatched items represent timing differences or unrecorded transactions requiring attention.

Addressing Discrepancies

After comparison, any unmatched items indicate discrepancies needing investigation. Common reasons include timing differences, such as uncashed checks or deposits still in transit. These “outstanding” items typically clear within a few business days, often appearing on the next statement. Other discrepancies might involve errors in your internal records, such as incorrect amounts, duplicate entries, or missed transactions.

If a transaction appears on the bank statement but not in your records, it may be a bank error or an unrecorded item like a service charge or interest payment. For suspected bank errors, contact the financial institution promptly, generally within 60 days of the statement date for electronic fund transfer errors, to dispute the transaction. For internal record errors, make adjusting entries to correct account balances and ensure accuracy. Identifying and resolving these differences is a primary benefit of regular reconciliation, leading to precise financial reporting.