Learn the basics of reconciliations in accounting, from the balance sheet account reconciliation to adjusting a journal entry, here’s what you should know.
What is Reconciliation?
Account reconciliation in accounting is when two matching sets of data are compared to ensure they are consistent and accurate.
Businesses use their internal balance sheet accounts and compare them with external sources, like bank statements and supplier invoices, to ensure that everything aligns with the same dates.
Account reconciliation allows businesses to be confident in financial records, knowing that what they’ve charged and received is correct. This, in turn, allows companies to access their account balances and forecast their cash flow accurately.
Most businesses will use double-entry accounting as it is required by the Generally Accepted Accounting Practice (GAAP) for recording accounts payable in the correct period.
Types of Reconciliation
There are various types of reconciliation in accounting:
- Customer reconciliation: This compares the accounts receivable ledger against the receivables control account in the general ledger. Both ledgers provide all the records with a summary of all the transactions.
- Bank reconciliation: Here the bank records are compared against a monthly bank statement.
- Intercompany reconciliation: This is generally for a company that forms part of a bigger group. The comparison is between the two companies and should match. This likely comes in the form of a parent company loaning funds to the smaller company.
- Vendor reconciliation: Comparing the balances of the transactions in the payable ledger to the supplier statements.
- Business-specific reconciliation: These are unique to individual businesses. If there are any sort of expense reports from employees or stock takes, these need to be reconsolidated against what is there and what has been given out.
Defining the type of reconciliation can help when various types of balance sheet reconciliations need validation.
Why Businesses Should Reconcile Accounts
The reconciliation process is vital for business success; here’s why:
- Better supplier relationships: By reconciling vendor accounts, companies can ensure that they are making timely payments that could impact the supply chain and the relationship between vendor and supplier.
- Accurate annual accounts: The account reconciliation process is essential for maintaining accurate financial statements. Particularly for any company that needs to file annual audits and statements.
- Avoid penalties: Through regular bank reconciliations, a business minimizes the risk of late payments or going over limits on credit card accounts. Both of these can incur unnecessary fines.
When Are Reconciliations Done?
How often your company does reconciliations is based on the nature of the business and the types of reconciliation that need doing.
A large company may reconcile their banking on a weekly or daily basis, depending on how many transactions are going through. Account balances need to be heavily monitored at this level.
In the same breath, if a company is moving a lot of stock daily, regardless of the size, they may need to reconcile stock daily to monitor what is going out.
How to Accurately Reconcile Accounts
To perform account reconciliation properly, the following should happen:
- Check the opening balance: Make sure the opening balance and the internal data match with the closing balance of the external document.
- Note the difference: Record the differences between the closing balances. Work out the amount needed to reconcile the account.
- Update the internal record: Update the internal data to match the transaction from the external document. This is important to show whether they balance and if the company has missed something.
- Review the closing balance and create a report: Verify that the reconciled amount matches the external document. If not, then you need to explain the difference in a reconciliation report.
Do All Businesses Need to do Reconciliations?
Yes, no matter how small a business is, account and stock reconciliations are essential to ensure a business’s financials are up to date. It’s very easy for one small typo to make a big difference to a business’s financials.
Our Final Thoughts
Account reconciliation is essential for any business’s financial success. Accounts need to be monitored to ensure a business is reporting the correct financial information come tax season.
Reconciling accounts can take up a lot of time, as well as some tech knowledge if accounting software is used. Hiring an accountant can take the stress off sifting through individual invoices and comparing statements.