Reconciliation in Accounting: How-To Guide

The different types of reconciliation include bank, customer, vendor, intercompany, and business-specific reconciliation. After scrutinizing the account, the accountant detects an accounting error that omitted a zero when recording entries. Rectifying the error brings the current revenue to $90 million, which is relatively close to the projection. For example, Company XYZ is an investment fund that acquires at least three to five start-up companies each year. For the current year, the company estimates that annual revenue will be $100 million, based on its historical account activity.

• After scrutinizing the account, the accountant detects an accounting error that omitted a zero when recording entries.
• During reconciliation, you should compare the transactions recorded in an internal record-keeping account against an external monthly statement from sources such as banks and credit card companies.
• Similarly, if you were expecting an electronic payment in one month, but it didn’t actually clear until a day before or after the end of the month, this could cause a discrepancy.
• Reconciling your accounts can help you achieve this goal by identifying discrepancies and taking appropriate corrective action.
• Transactions that impact a company’s bottom line — net income — are split between accounts on the balance sheet and the income statement.
• How controllers can achieve a strategic mindset to benefit their teams and the business.

While some fraudsters exhibit a true evil genius in covering their tracks, most thieves aren’t that clever. Careful attention to details and review of reconciliations by someone who doesn’t work with that account can help catch many instances of fraud. Moreover, the process of account reconciliation can also be automated or assisted with the help of financial software or services, although human oversight is usually necessary to validate and verify the results.

Automated reconciling

This article elaborates on reconciliation meaning in accounting, account reconciliation process and tips to carry out reconciliation activities accurately and on time in detail. Thus, such reconciliation of bank statements can be carried out on a weekly, monthly, bi-annual or annual basis as desired by the business or deemed necessary by it. It allows businesses to prove their accounting balance and transactions are correct. Once data is gathered from these sources, the software, through advanced encoding, then compares account balances between documents from the different sources and identifies discrepancies. These are then investigated by accounting staff to identify the main cause of the discrepancies. Account reconciliation software is a computerized program that automates the account reconciliation process, making it more streamlined, quicker, and easier to execute than using paper-based manual spreadsheets.

This helps uncover omissions, duplication, theft, and fraudulent transactions. For example, the internal record of cash receipts and disbursements can be compared to the bank statement to see if the records agree with each other. The process of reconciliation confirms that the amount leaving the account is spent properly and that the two are balanced at the end of the accounting period.

How Reconciliation Works

Stripe’s automated system handles this comparison, enabling you to capture revenue accurately and reconcile your internal accounting systems with Stripe-processed charges and refunds at a transaction level. Historical details of cash accounts or bank statements are used to identify irregularities, balance sheet errors, or fraudulent activities. One example of where this method is used is a case scenario involving a company that records an average annual revenue of $50 million based on historical records.

Reconciliation for individuals

Non-sufficient funds (NSF) checks are recorded as an adjusted book-balance line item on the bank reconciliation statement. For example, say ABC Holding Co. recorded an ending balance of $500,000 on its records. After careful investigation, ABC Holding found that a vendor’s check for $20,000 hadn’t been presented to the bank.

What Appears on a Bank Reconciliation Statement?

The cash account balance in an entity’s financial records may also require adjusting in some specific circumstances, if you find discrepancies with the bank statement. After fee and interest adjustments are made, the book balance should equal the ending balance of the bank account. In the double-entry accounting process, all transactions get posted as both debits and credits. Individuals could also use the process to verify the accuracy of their banking and credit card accounts. Here, they’d match records like receipts or cheques with entries in the general ledger.

Balance sheet reconciliation involves comparing the balances of internal accounts against corresponding external documents. It’s a bit like our earlier example with the bank statement, but this process is broader. Balance sheet account reconciliation can cover everything from cash and investments to liabilities and shareholders’ equity (any accounts found on the balance sheet).

The individual is reimbursed for the incorrect charges, the card is canceled, and the fraudulent activity stopped. Tick all transactions recorded in the cash book against similar transactions appearing in the bank statement. Make a list of all transactions in the bank statement that are not supported, i.e., are not supported by any evidence such as a payment receipt.

Reconciliation is also used to ensure there are no discrepancies in a business’s accounting records. This works by comparing 2 sets of records and is a way of making sure all the figures are correct and match up. Reconciliation has become a byword for consistency, accuracy, and thoroughness. For example, a company maintains a record of all the receipts how to prepare financial statements for purchases made to make sure that the money incurred is going to the right avenues. When conducting a reconciliation at the end of the month, the accountant noticed that the company was charged ten times for a transaction that was not in the cash book. The accountant contacted the bank to get information on the mysterious transaction.

Some of the possible charges include ATM transaction charges, check-printing fees, overdrafts, bank interest, etc. The charges have already been recorded by the bank, but the company does not know about them until the bank statement has been received. It is possible to have certain transactions that have been recorded as paid in the internal cash register but that do not appear as paid in the bank statement. An example of such a transaction is a check that has been issued but has yet to be cleared by the bank.

The process of account reconciliation is all about creating a more robust and reliable financial foundation for your business. Even if you are using software that automatically downloads your monthly bank transactions, it’s still important to reconcile your accounts. Here is a simple process you can follow to make sure your accounts are reconciled every month. If there are any differences between the accounts and the amounts, these differences need to be explained. Reconciling your bank statements allows you to identify problems before they get out of hand.