Pricing

FAQ

How Does Account Reconciliation Work? Definition and Examples

Facebook
Twitter
LinkedIn

Want help with your bookkeeping? We make it easy. Get started, Speak w/ a Founder, or Schedule a Callback

 

In the world of business, there are often times when one company is unsure of the accuracy of its financial data. This can cause a lot of confusion and in some cases, even lead to costly mistakes. That’s why it’s important to understand the concept of account reconciliation. Account reconciliation is a process that helps ensure accuracy between two sets of records. It helps ensure the accuracy between the accounts receivable (money coming into the business) and accounts payable (money going out). In this blog post, we’ll provide an overview of how to account reconciliation works, its definition and provide some examples.

 

What Is Account Reconciliation?

 

Account reconciliation is the process of comparing your records to your bank or credit card statement in order to ensure that all transactions are accounted for. This can be done manually, but many businesses use accounting software to automate the process.

 

There are a few different types of account reconciliation, but the most common is comparing your checkbook register to your bank statement. This will help you catch any errors, such as checks that have not cleared or deposits that have not been credited.

 

Another type of account reconciliation is between your credit card statements and your records. This is important to do because it can help prevent fraud and identify any unauthorized charges.

 

Reconciling your accounts on a regular basis is an important part of managing your finances and ensuring that your records are accurate. By doing so, you can avoid costly mistakes and keep track of where your money is going.

 

When Is It Done?

 

account reconciliation

 

Once all of the transactions have been accounted for and any discrepancies have been resolved, the account reconciliation is complete. At this point, you will have a clear understanding of your current financial position and can move forward with confidence.

 

It is important to note, however, that in certain cases, account reconciliations may need to be done more frequently. For example, if you are dealing with large amounts of money or have complex transactions, it is typically advised to perform an account reconciliation on a monthly basis.

 

What Are the Types of Reconciliation?

 

There are two types of reconciliation:

  • Internal Reconciliation
  • External Reconciliation

 

Internal reconciliation

 

It is when a company reconciles its own records, usually on a monthly basis. Internal reconciliation involves the comparison of a corporation’s financial records among different departments or divisions within the same company. It is a process of verifying that all transactions, account balances, and statements are accurate and in agreement with one another. Internal reconciliation ensures that the company’s financial books are accurate and up to date. It also helps to identify discrepancies, errors, or fraud before they can become serious problems.

 

External reconciliation

 

It is when a company reconciles its records with those of another company or entity, such as a bank. The most common type of external reconciliation is between a company and its customers (customer reconciliations) or suppliers (supplier reconciliations). This type of reconciliation is typically done on a regular basis, such as monthly or quarterly, and includes comparing the amounts each party has recorded for invoices, payments, and credits. During this process, any discrepancies are identified and resolved to ensure accuracy in both entities’ records. The ultimate goal of external reconciliation is to have accurate records that can be used for reporting and analysis.

 

What Are the Special Considerations?

 

account reconciliation

 

There are a few special considerations to keep in mind when reconciling accounts:

 

  1. Make sure all transactions are accounted for. This means reviewing each and every transaction that has occurred in the account being reconciled, whether it is a deposit, withdrawal, transfer, or payment.
  2. Be aware of any cut-off dates. This is the date after which transactions will not be included in the current statement period. For example, if you are reconciling your checking account as of March 31st, any checks written on April 1st will not appear on the statement and will need to be accounted for separately.
  3. Check for any discrepancies between the statement balance and the account balance in your records. If there are any differences, determine what caused them and make adjustments accordingly. This could be due to outstanding checks or deposits, errors in recording transactions, etc.
  4. Make sure to take into account any fees or interest that may have been charged during the period being reconciled. These can often be found on the last page of the statement.

 

Once all of these factors have been considered and accounted for, you can then compare the ending balances of both the statement and your records to confirm that they match. If they do not, further investigation will be needed to determine where the discrepancy lies.

 

What Is the Process for Account Reconciliation?

 

Assuming you are referring to the process of reconciling a company’s bank statements with its internal records, there are generally four steps involved:

 

  1. Compare the beginning cash balance on the bank statement with the ending cash balance from the previous month’s reconciliation. This will help to identify any discrepancies that may exist.
  2. Review all deposits and checks that have cleared the account since the last reconciliation was performed. Make sure that all of these items have been properly recorded in the company’s books.
  3. Identify and investigate any outstanding checks or deposits. This includes reviewing any stop payments that may have been placed on checks that have not yet cleared.
  4. Adjust the company’s books to reflect any discrepancies that were found during the reconciliation process. This may require journal entries to be made to correct errors in the bookkeeping records.

 

Example of Account Reconciliation

 

account reconciliation

 

Assuming you have your business’s financial statements and supporting documentation for the period in question, account reconciliation is the process of comparing these documents to your company’s corresponding records. The goal is to ensure that both sets of records match and agree with each other.

 

For example, let’s say you’re reconciling your business’ bank statement with your own internal records. You would start by comparing the ending balance on the bank statement with the ending balance in your records. If these two numbers match, then you can move on to the next step.

 

If there is a discrepancy, you will need to investigate further to determine where the error occurred. This may involve looking at individual transactions and comparing them between the two sets of records. Once you have identified the cause of the discrepancy, you can make the necessary adjustment in your records and proceed with reconciling the rest of the account.

 

What Are the Best Practices for Account Reconciliation?

 

The best practices for account reconciliation are as follows:

 

  1. Establish a clear and concise reconciliation policy. This policy should outline the types of reconciliations to be performed, who is responsible for each type, and the frequency with which they should be performed.
  2. Perform reconciliations on a timely basis. Timely reconciliations are essential in order to prevent errors and discrepancies from going undetected for extended periods of time.
  3. Maintain accurate and up-to-date records. Accurate records are necessary in order to properly reconcile accounts. Out-of-date records can lead to errors and missed discrepancies.
  4. Review reconciliations regularly. Regular reviews of reconciled accounts help to ensure that errors and discrepancies are caught in a timely manner.

 

Why Should You Reconcile Your Accounts?

 

If you want to keep an accurate picture of your finances, you need to reconcile your accounts. This process ensures that your books and records match the actual balances in your accounts. There are many reasons why you should reconcile your accounts. First, it gives you an early warning if there are any errors or discrepancies. This way, you can correct them before they cause any further damage. Second, reconciling your accounts helps you prevent fraud and theft. If someone has stolen money from you, reconciling your accounts will help you catch the thief and get your money back. Third, reconciling your accounts helps you manage your finances more effectively. When you know exactly where all of your money is going, it’s easier to make informed decisions about how to spend it. Fourth, reconciling your accounts makes it easier to prepare your taxes. The IRS requires that businesses keep accurate records of their income and expenses. If you don’t reconcile your accounts, preparing your taxes will be much more difficult – and it could even lead to an audit. Finally, reconciling your accounts shows creditors that you’re serious about managing your finances responsibly. This could lead to lower interest rates on loans and other benefits from creditors down the road.

 

Conclusion

 

Account reconciliation is an essential element of managing finances. It ensures accuracy in financial reporting and facilitates the identification of discrepancies between records. This article has provided a comprehensive overview of how to account reconciliation works, including its definition, process, and examples. With this knowledge, you can now confidently perform your own account reconciliations or even delegate them to a trusted accounting professional for more reliable results.

Want bookkeeping off your plate? We’ve got you! Get started, Speak w/ a Founder, or Schedule a Callback

Recent Posts

Kayla Bloom

Kayla Bloom

Kayla Bloom is a freelance Finance Writer specializing in topics related to Accounting, Bookkeeping, Taxes, and Business Finances. She lives in Miami, Florida.

Avoid the Most Common Ecommerce Bookkeeping Mistakes

Get step-by-step processes to avoid 10 common eCommerce bookkeeping mistakes.

Leave a comment

Your email address will not be published. Required fields are marked *

Exclusive finance guide

Want better bookkeeping?

It's possible! Subscribe below & we'll send you our Bookkeeping Packet. A pack of resources to teach you about bookkeeping.

You’ll get our Ecommerce Bookkeeping Guide, The 10 Ecommerce Bookkeeping Mistakes Ebook, our Monthly Finance Meeting Agenda, & a few surprises!