Many companies and people reconcile their accounts to make sure they're in good financial standing. Reconciling your accounts is a great way to detect fraudulent charges or monetary discrepancies on your various bank accounts. In this article, we will define account reconciliation, the various methods of the process and how to perform account reconciliation.

What is an Account Reconciliation

Account reconciliations are activities performed by accountants, typically at the end of an accounting period, to ensure the general ledger account balance is complete and accurate. Generally, account reconciliations compare the general ledger balance of an account to independent systems, third-party data, or other supporting documentation to substantiate the balance stated in the general ledger.

For example, if you purchased a sweater for $20, you'd want to make sure that not only was $20 spent, but that $20 left your account and was reflected in your bank statement. You could use your store receipt to compare the amount you were charged with your bank statement to verify this.

Why should you reconcile accounts?

It's important to reconcile your financial accounts regularly to ensure that you know how much money you have and where it is being spent. If there are any overdrafts on your accounts, overcharges or cases of fraud happening, it's best to know sooner rather than later. This could potentially save you money in the future. If you have an accountant, reconciling your accounts will help them produce reliable financial statements. If you have a company, performing account reconciliation is equally as important as it ensures an accurate balance sheet.

To verify that the monetary value leaving your account is the same amount spent, it's important to perform the account reconciliation process. Both amounts should balance by the end of the accounting period. Understanding how to perform account reconciliation is vitally important in helping to uncover potential theft or fraudulent transactions. Once you understand how to balance these records, you'll be in better financial health. Here are the steps to take when performing account reconciliation:

1. Compare your records with your bank statement

First, you'll need to have both the internal and external records on hand. Once you have them, review them and detect any differences in the transactions made. For example, if you purchased groceries for $100, you'll want to see $100 reflected in your bank account and vice versa. To rectify any errors, this will need to be proven by evidence. In this case, the documentation serves as your evidence.

2. Identify any discrepancies

To identify a discrepancy, you'll need to search for charges listed on your receipt that are not reflected on your bank account and vice versa. Take careful consideration into making sure the money leaving your account and the money being spent is recorded on both records. If you detect any situations in which a balance was reflected on one means but not the other, this is indicative of a discrepancy. If there are any discrepancies, you'll need to remedy the situation by adding the correct transactions to both records.

3. Balance the records

Once you've compared the external and internal financial documents and rectified any discrepancies, you've balanced both accounts and have therefore achieved account reconciliation. This means you or your business is financially healthy.

What Causes Reconciliation Discrepancies?

Discrepancies may be identified in the reconciliation process. They may be caused by a variety of factors including timing differences, missing transactions, or mistakes.

Timing Differences

There may be instances where activity is captured in the general ledger but not the supporting data or vice versa, which may be due to a timing difference. For example, while performing an account reconciliation for a cash account, it may be noted that the general ledger balance is $100,000, but the supporting documentation (i.e., a bank statement) says the bank account has a balance of $110,000.

Upon further investigation, it is identified that the Company wrote a check for $10,000 which has not yet cleared the bank. As such, a $10,000 timing difference due to an outstanding check should be noted in the reconciliation.  

Missing Transactions

There may be instances where activity is captured in the general ledger but not the supporting data or vice versa, which may be due to missing transactions. For example, while performing an account reconciliation for a credit card receivable account, it may be noted that the general ledger balance is $180,000, but the supporting documentation (i.e., credit card processing statement) has a balance of $200,000.

Upon further investigation, it is identified that four transactions were improperly excluded from the general ledger but were properly included in the credit card processing statement. As such, a $20,000 discrepancy due to the missing transactions should be noted in the reconciliation and an adjusting journal entry should be recorded.

HTH & Accounting Associates help organizations and business owners with accounting and/or financial consulting services.  

For Help with accounting cycle or Bookkeeping contact us at accounting@thaddeus.org or call us at 909-599-2111

References

What is Account Reconciliation: Definition and How It Works | Indeed.com  

What Is Account Reconciliation? | BlackLine Magazine

Thank you for reading,

Sapna Parakh  

I am Sapna Parakh and I work at Thaddeus as an Accounting Intern. I choose Thaddeus because of the work environment and the mission is to empower women. I dream to become a successful Accountant.