Accounting Reconciliation: What It Is, How to Do It, and Best Practices

Today, most accounting software applications will perform much of the bank reconciliation process for you, but it’s still important to regularly review your statements for errors and discrepancies that may appear. Regularly reconciling your accounts, especially bank accounts and credit card statements can also help you identify suspicious activity and investigate it immediately, rather than months after it has occurred. And if you never reconcile your accounts, chances are that fraudulent activity will continue. Accounts payable reconciliation makes sure that general ledger balances match those in underlying subsidiary journals. It adheres to accrual accounting principles and reconciles balances for credit card statements to the appropriate payables account.

What is the Account Reconciliation Process?

According to a survey conducted by the Association of Certified Fraud Examiners (ACFE), financial statement fraud constituted 9% of all reported net debit balance definition fraud cases in 2022. This highlights the significance of accurate accounting reconciliation in detecting and preventing fraudulent activities within an organization. By reconciling financial records, such as bank statements, invoices, and receipts, businesses can identify discrepancies and irregularities and protect themselves against potential fraud. To ensure accuracy and balance, the process of account reconciliation involves comparing the balances of general ledger accounts with the supporting sets of data sources, such as bank statements, invoices, and receipts. Account reconciliation comes in various forms, each tailored to address specific financial aspects and discrepancies within an organization. Understanding the different types is crucial for maintaining financial accuracy and transparency.

1. Balance sheet account reconciliation can cover everything from cash and investments to liabilities and shareholders’ equity (any accounts found on the balance sheet).
2. We’ll cover best practices and strategies that organizations can use to streamline their reconciliation processes, minimize errors, and establish a solid foundation for financial management.
3. Reconciliation is typically done at regular intervals, such as monthly or quarterly, as part of normal accounting procedures.
4. When it comes to cash accounts, a business’s internal records might show a specific balance at the end of the month.
5. This includes investigating any differences, making necessary adjustments, and documenting the process for accuracy.

Unfortunately, many businesses tend to overlook this current ratio vs working capital very important process, which leaves their business vulnerable to costly errors and even fraud. By practicing regular reconciliation, businesses protect their integrity, demonstrating a commitment to accuracy and transparency. Here is a simple process you can follow to make sure your accounts are reconciled every month. Reconciling the company’s accounts helps detect fraud and aids in regulatory compliance.

Step 3: Reconcile trust bank account

Often, this process involves comparing internal financial records against monthly statements issued by external sources, like banks. For example, when performing bank reconciliation, a business compares its financial statements with the records received from the bank. This helps identify timing delays in deposits, payments, fees, and interest that may have been recorded by one entity but not the other. Account reconciliations should be performed regularly, ideally monthly, to ensure financial records are accurate and up-to-date. Such regular and timely reconciliations support financial integrity and informed decision-making. A common example of account reconciliation is comparing the general ledger to sub-ledgers, such as accounts payable or accounts receivable.

Intercompany reconciliation is a process that occurs between units, divisions, or subsidiaries of the same parent company. This type of reconciliation involves reconciling statements and transactions to ensure that all business units are on the same page financially. Vendor reconciliations involve comparing the statements provided by vendors or suppliers with the business’s accounts payable ledger. Reconciliations are usually performed at the end of an accounting period, such as what is a point of sale pos system how to choose the right software during the month-end close process, to ensure that all transactions are correctly verified and the closing statements are accurate. This blog delves into the essentials of account reconciliation, outlining the step-by-step process, and exploring the various types of reconciliation.

The differences may sometimes be acceptable due to the timing of payments and deposits, but any unexplained differences may point to potential theft or misuse of funds. The objective of doing reconciliations to make sure that the internal cash register agrees with the bank statement. Once any differences have been identified and rectified, both internal and external records should be equal in order to demonstrate good financial health.

Bank reconciliation

The charges have already been recorded by the bank, but the company does not know about them until the bank statement has been received. Clio’s legal trust management software, and Clio Accounting both provide lawyers with the ability to conduct trust account reconciliation–helping to keep your firm compliant and your client’s funds secure. Some businesses with a high volume or those that work in industries where the risk of fraud is high may reconcile their bank statements more often (sometimes even daily). Accounting reconciliation plays a fundamental role in ensuring that financial statements are reliable, detecting errors, preventing fraud, and maintaining compliance with regulatory requirements.

Account reconciliation is a financial reconciliation, with no real difference, except for how the results of the reconciliation process will be used. Cash accounting is the easiest way to manage your accounting, and provides a better picture of your cash flow, but is only a suitable method for very small businesses. Reconciliation in accounting is the process of reconciling the balance between two different sets of documents.

As such, a $40,000 discrepancy due to the missing transactions should be noted in the reconciliation, and an adjusting journal entry should be recorded. An investigation may determine that the company wrote a check for $20,000, which still needs to clear the bank. In this case, a $20,000 timing difference due to an outstanding check should be noted in the reconciliation.