What is reconciliation in accounting?

Reconciliation in accounting is the process of making sure all the numbers in your accounting system match up correctly. For example, when reconciling your bank statement with your company's ledger, bank reconciliation means comparing every transaction to make sure they match. This practice helps identify and rectify discrepancies, including missing transactions. In essence, reconciliation acts as a month-end internal control, making sure your sets of records are error-free.

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Reconciliations are usually performed at the end of an accounting period, such as during the month-end close process, to ensure that all transactions are correctly verified and the closing statements are accurate.

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In this article we will explore:

• The various different types of reconciliation, from accrued liabilities to prepaid assets. 
• The account reconciliation process: how to reconcile balance sheet accounts, and how often to do it.
• The two main approaches to perform account reconciliation: reviewing documents and doing an analytics review.
• The causes of reconciliation discrepancies, including missing transactions and timing inconsistencies in reporting. 
• An example of balance sheet reconciliation in the context of a small business. 
• An explanation of why account reconciliation is important to stay on top of.
• Ways to streamline the reconciliation process, including the use of accounting software.

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Access Ramp's free PDF examples and templates of reconciliation reports in our Accounting Documents Library.

Types of reconciliation

Account reconciliations are an essential part of financial management in any business. These reconciliations can be performed in several ways, depending on the context. 

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In most cases, account reconciliations are performed against the general ledger. This is because the general ledger is considered the master source of financial records for the business. By performing reconciliations against the general ledger, the company can ensure that its financial records are accurate and up-to-date. The account reconciliation process can involve several financial accounts.

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Financial accounts that need reconciliation include:

• Accounts payable
• Accrued liabilities
• Credit cards
• Bank statements
• Vendor statements
• Intercompany reconciliations
• Business-specific reconciliations
• Income tax liabilities
• Fixed assets and accumulated depreciation
• Cash equivalents
• Shareholders' equity
• Cash accounts using bank statement reconciliations
• Accounts receivable
• Capital accounts
• Inventory
• Intangible assets and amortization
• Notes payable (short-term and long-term components)
• Prepaid assets

Accounts payable

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. This process involves reviewing both credit and debit transactions.

Accrued liabilities

This type of reconciliation involves reconciling beginning balances, listing and adding new transactions, subtracting payments, and calculating ending balances for accrued liabilities, such as wages, benefits, and payroll taxes.

Credit cards

Reconciling credit cards involves comparing purchase receipts with credit card statements provided by the card company. This helps to ensure that all credit card transactions have been accurately recorded in the business's financial records.

Bank statements

Bank reconciliations involve comparing the business's financial statements with the statements it receives from the bank. This helps to ensure that the business's records accurately reflect the transactions that have taken place in its bank account.

Vendor statements

Vendor reconciliations involve comparing the statements provided by vendors or suppliers with the business's accounts payable ledger. This helps ensure that the company pays vendors and suppliers accurately and on time.

Intercompany reconciliation

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.

Business-specific reconciliations

Business-specific reconciliations are performed within a specific business unit, such as stock inventory or expense reconciliation. This helps to ensure that the financial records of that unit are accurate and up-to-date.

Income tax liabilities

Income tax liabilities are reconciled through a schedule to compare balances with the general ledger. Adjustments are made as necessary to reflect any differences via journal entries.

Fixed assets and accumulated depreciation

This reconciliation involves rolling forward fixed asset balances, accounting for purchases, sales, retirements, and accumulated depreciation. It makes sure that fixed asset and accumulated depreciation balances accurately offset each other in the general ledger.

Cash equivalents

Here, you reconcile general ledger accounts related to short-term investments with a maturity period of 90 days or less. Examples include treasury bills, commercial paper, and marketable securities. This reconciliation makes sure that your financial records match the balances on brokerage or financial institution statements.

Shareholders' equity

Shareholders' equity reconciliation provides transparency into your company's financial health from the perspective of its owners, emphasizing historical profitability and shareholder investments. This reconciliation focuses on two key components: retained earnings and capital accounts.

Cash accounts using bank statement reconciliations

This type of reconciliation involves comparing the cash account balances in your company's general ledger to the balances in your bank statements. It helps identify discrepancies caused by outstanding checks, unrecorded deposits, bank fees, or other timing differences.

Accounts receivable

Reconciliation for accounts receivable involves matching customer invoices and credits with aged accounts receivable journal entries. It makes sure that your customer account write-offs are correctly recorded against the Allowance for Doubtful Accounts and that discrepancies are addressed.

Capital accounts

Analyzing capital accounts by transaction, this reconciliation includes beginning balances, additions, subtractions, and adjustments to match general ledger ending balances for capital accounts. It covers aspects like common stock par value, paid-in capital, and treasury share transactions.

Inventory

Inventory reconciliation makes sure that physical inventory counts align with your general ledger. It accounts for transactions related to inventory and accounts payable and reconciles discrepancies. Additionally, it considers factors like the allowance for obsolescence and inventory valuation.

Intangible assets and amortization

This reconciliation manages intangible assets like goodwill, intellectual property, and licenses. It involves periodic analysis, evaluation, and amortization based on the asset's lifespan or impairments.

Notes payable (short-term and long-term components)

Reconciliation for notes payable contains sections for short-term and long-term notes. It involves listing beginning balances, adding new transactions, and checking for the accurate classification of short-term and long-term liabilities.

Prepaid assets

Reconciliation for prepaid assets checks the balances for different types of prepaid assets, factoring in transactions like additions and amortization. Prepaid assets, such as prepaid insurance, are gradually recognized as expenses over time, aligning with the general ledger.

How to reconcile balance sheet accounts

Reconciling balance sheet accounts is a critical process to make sure that your company's financial records accurately reflect its financial position. Below is a comprehensive guide on how to reconcile balance sheet accounts effectively:

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1. Gather documents: Gathering and preparing all the required documentation is essential. This includes identifying the appropriate account(s) to be reconciled and the reporting period (month, quarter, or year) to which the reconciliation will apply. Account ledgers with debits and credits for the period under review will provide the transaction details to be reconciled. The relevant financial documents can include bank statements, invoices, receipts, and any subsidiary ledgers.

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2. Review opening balances: Begin with the opening balances from the previous reconciliation or the beginning of the accounting period. Match the beginning balance in the account with the ending balance from the prior period to identify any discrepancies.

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3. Compare transactions: Match each transaction on the financial statements with the corresponding entry in your records. You'll want to compare the general ledger account balance with independent systems, third-party data, or other supporting documentation, such as bank and credit card statements. 

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4. Investigate discrepancies: If you encounter discrepancies, investigate the root cause. It could be errors, timing differences, or missing entries.

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5. Correct errors: If you find errors, correct them promptly. This may involve adjusting entries to bring your records in line with the actual financial transactions.

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6. Reconcile bank accounts: For bank accounts, compare your company's general ledger to the bank statement. Look for any outstanding checks, deposits in transit, or bank fees that might explain the differences.

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7. Reconcile other accounts: For accounts like accounts receivable, accounts payable, or inventory, make sure that the balances in your subsidiary ledgers match the corresponding general ledger accounts.

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8. Record adjustments: Make any necessary journal entries or adjustments to reconcile your accounts. These entries should be well-documented and traceable.

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9. Document the reconciliation: Maintain thorough documentation of the reconciliation process. This includes notes, records, and any supporting documents. A controller or accounting manager will review the analysis to ensure all balances align, supporting documents are provided to verify the transactions, and adjustments were appropriately made.

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10. Perform regular reviews: Reconcile balance sheet accounts regularly. The frequency may vary based on the account type and your business's needs, but it's generally recommended to perform reconciliations monthly or at least quarterly.

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11. Use reconciliation tools: Use accounting software or specialized reconciliation tools to streamline the process.

How often to reconcile accounts

The frequency of reconciling accounts varies for different businesses. For example, a grocery store dealing with daily cash transactions relies on daily cash reconciliations to manage cash flow effectively. In contrast, a consulting firm may find that monthly reconciliations for invoices and expenses are enough. Meanwhile, a construction company dealing with equipment and material costs may choose quarterly reconciliations to guarantee their financial processes operate smoothly.

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Regardless of the type of business you operate, though, performing reconciliations routinely can help you identify and correct errors in data entry, post adjustments for timing discrepancies with bank transactions, fees, and interest, ensure the accuracy and validity of financial statements produced by the business, comply with financial regulations, and adequately prepare tax filings. Accuracy and strict attention to detail are crucial to any account reconciliation process. This is important for ensuring the reliability of financial reporting in any organization and maintaining the integrity of the process and results.

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However, as a general guide:

• Bank accounts: It's advisable to reconcile bank accounts monthly to catch errors or discrepancies promptly and provide accurate cash flow management.
• Accounts receivable and payable: Accounts receivable and payable often need more frequent attention, even on a daily or weekly basis. This regularity helps businesses manage their cash flow effectively and maintain good relationships with customers and suppliers.
• Inventory: Inventory reconciliation depends on the size and activity of your inventory. For businesses with a lot of inventory turnover, monthly reconciliation keeps everything in check. However, companies with slower turnover might find that quarterly reconciliation is enough to make sure their supply chain lines up with demand.
• Other balance sheet accounts: Most other balance sheet accounts should be reconciled on a monthly or quarterly basis. However, certain accounts, like fixed assets, may only require annual reconciliation.

What are the two basic methods of account reconciliation?

Account reconciliation is typically carried out at the end of an accounting period, such as monthly close, to ensure that all transactions have been accurately recorded and the closing statements are correct.

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There are two methods to carry out an account reconciliation:

1. Reviewing documents. This involves examining transactions in a business's financial records and comparing them with source documents, such as receipts, invoices, or statements.

2. Doing an analytics review. This method involves comparing historical data with current data. If the accounting figures of the present are significantly different from the projections made from historical data, this may indicate irregularities.

Businesses use one of these two approaches to perform account reconciliation in various contexts. 

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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.

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Most account reconciliations are performed against the general ledger, considered the master source of financial records for businesses.

What causes reconciliation discrepancies?

Account reconciliation is a process that involves identifying discrepancies between business ledgers and outside source documents. Accuracy and strict attention to detail are the fundamental principles of this process. Various factors, such as timing differences, missing transactions, and mistakes can cause these discrepancies.

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Timing differences occur when the activity that is captured in the general ledger is not present in the supporting data or vice versa due to a difference in the timing in which the transaction is reported.

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For example, while performing an account reconciliation for a cash account, it may be noted that the general ledger balance is $500,000. Still, the supporting documentation (i.e., a bank statement) says the bank account has a balance of $520,000.

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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.

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Missing transactions can also cause discrepancies. 

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For instance, while performing an account reconciliation for a credit card clearing account, it may be noted that the general ledger balance is $260,000. Still, the supporting documentation (i.e., credit card processing statement) has a balance of $300,000. Further analysis may reveal that multiple transactions were improperly excluded from the general ledger but were adequately included in the credit card processing statement. 

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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.

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Mistakes can also cause discrepancies between the general ledger and the supporting data. 

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For example, while performing an account reconciliation for a cash account, it may be noted that the general ledger balance is $249,000. Still, the supporting documentation (i.e., a bank statement) says the bank account has a balance of $249,900.

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An investigation may determine that the company recorded bank fees of $1,000 rather than $100. A $900 error should be noted during the reconciliation, and an adjusting journal entry should be recorded.

Why is account reconciliation important?

Account reconciliation is a crucial function in business accounting that helps address several fundamental objectives in the accounting process.

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Firstly, it is necessary to identify errors due to data entry mistakes, bank account discrepancies, information omission, duplication, or some other reason. 

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Secondly, account reconciliation helps identify fraudulent activity committed by employees, dishonest customers, vendors, suppliers, or cyber-thieves. Duplicate checks, unauthorized credit card activity, or altered invoices are some common practices that can be identified through account reconciliation.

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Thirdly, account reconciliation is vital to ensure the validity and accuracy of financial statements. Individual transactions are the building blocks of financial statements, and it is essential to verify all transactions before relying on them to produce the statements.

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Lastly, in the United States, account reconciliation is crucial to help companies comply with federal regulations applied by the Securities and Exchange Commission (SEC) under the Sarbanes-Oxley Act. Businesses worldwide must also comply with all local laws and regulations.

Example of balance sheet reconciliation

Imagine you're the owner of a small retail store. At the end of each month, you diligently reconcile your balance sheet accounts. One crucial aspect is reconciling your accounts receivable. You compare the outstanding customer invoices in your records to the actual payments received, identifying any discrepancies.

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This reconciliation guarantees that your accounting records maintain an accurate account of the amounts customers owe your business. It's a critical tool for maintaining a healthy cash flow and preventing any missed payments from going unnoticed.

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Streamlining the reconciliation process

Account reconciliation is a vital process that helps businesses maintain their financial health by identifying errors, preventing fraud, and ensuring the validity and accuracy of all financial statements.

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Simplifying the reconciliation process is like fine-tuning the engine of your financial operations. Here are some effective ways to make this crucial task easier and more efficient:

• Use accounting software: Leveraging advanced accounting software like NetSuite, QuickBooks, Xero, or Sage can be a game-changer. These platforms offer integration with Ramp, which streamlines the reconciliation process by automating financial data synchronization and reducing manual data entry.
• Categorize transactions: Efficiently categorizing transactions, such as income, expenses, and assets, simplifies the reconciliation process. It makes sure that every financial entry aligns accurately with the corresponding account on your balance sheet.
• Regular reconciliation: Schedule regular reconciliation sessions, whether monthly, quarterly, or annually, depending on your business needs. Consistency helps identify and rectify discrepancies promptly.
• Bank feeds: Make use of bank feeds provided by accounting software. These feeds automatically import bank transactions, reducing manual data entry and minimizing errors.
• Maintain clear documentation: Keep detailed records and documentation of financial transactions. This documentation makes it easier to trace and rectify discrepancies during reconciliation.
• Separate business and personal expenses: It’s important to keep business and personal expenses separate. When the two are combined, it can make it difficult to reconcile accounts and lead to mistakes.
• Reconcile subsidiary ledgers: If you have subsidiary ledgers for accounts like accounts receivable or accounts payable, reconcile these regularly to maintain accurate records.
• Regularly update software: Keep your accounting software up to date. Software updates often include enhancements and bug fixes that can improve the reconciliation process.
• Staff training: Invest in training for your finance team to make sure they’re well-versed in the software and reconciliation processes. Knowledgeable staff can speed up the process and reduce errors.
• Use reports: Generate and review reconciliation reports offered by your accounting software. These reports provide insights into discrepancies and can help pinpoint areas that require attention.

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Incorporating these strategies into your reconciliation process not only simplifies the task but also enhances the accuracy and efficiency of your financial management. Integration with accounting software like NetSuite, QuickBooks, Xero, or Sage, especially when paired with Ramp, can be a significant step toward streamlining your financial operations.

Elevate your reconciliation process with Ramp

Ramp’s all-in-one corporate card and expense management software streamlines your reconciliation process using AI-driven automation. Here are some of Ramp’s key features:

• Accounting automation: Ramp's AI-powered software seamlessly integrates with bookkeeping and accounting software, automating reconciliation tasks like receipt collections and expense categorization—saving time and reducing discrepancies caused by human error.‍
• Intelligent assistance: Ramp goes beyond mere automation, offering a level of intelligence that is like having a seasoned financial expert at your side. It provides accurate suggestions on expense categorization, drawing from a vast repository of past transactions and patterns. This means you can make informed financial decisions, forecasting swiftly and with confidence.‍
• Efficiency: The reconciliation process often entails a meticulous review of every line item, a time-consuming endeavor. Ramp speeds up your final review by using automation to process a multitude of transactions, identifying errors and promptly flagging any issues.‍
• Built to scale: Whether you're a global enterprise or a business on the rise, Ramp scales seamlessly with you. Our real-time data synchronization and expense automation streamlines your financial reporting so you can focus on growing your business.

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Ramp makes the reconciliation process precise and efficient, so your business can achieve financial excellence. Watch our product demo to see how Ramp can help you save.

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The information provided in this article does not constitute accounting, legal or financial advice and is for general informational purposes only. Please contact an accountant, attorney, or financial advisor to obtain advice with respect to your business.