Reconciliation in accounting: Guide to financial reporting

Reconciliation in accounting is the process of comparing internal financial records with external documents, such as bank statements or credit card statements, to ensure accuracy. The reconciliation process is key to verifying that your financial statements reflect the true financial position of the business.

Regular account reconciliation prevents discrepancies by identifying timing differences, missing transactions, and other issues that may affect your financial records.

What is the reconciliation process?

The reconciliation process involves comparing sets of records, such as your general ledger accounts and bank transactions, with external documents, such as bank statements or credit card statements. The goal is to ensure you’ve accurately recorded all financial transactions in your accounting records.

When you reconcile your bank account, for example, you compare the ending balance on your bank statement with the ledger balance in your general ledger. If you find discrepancies, such as overdrafts or unrecorded debits, make adjustments to reflect the correct account balance.

Reconciliation doesn’t just identify errors. It ensures your financial statements align with reality.

Types of reconciliation

There are several types of account reconciliation, but they all support accuracy in different areas of your financial records. Those types include:

Bank reconciliation

Bank reconciliation matches your bank statement with your general ledger accounts to align the bank balance with your internal records. Typically done on a monthly basis, it checks for missing transactions, deposits in transit, or bank fees that you haven’t yet recorded in the financial records.

Credit card reconciliation

Credit card reconciliation ensures that credit card statements match your accounts payable records and that each expense is recorded correctly. Because your general ledger accounts may not reflect credit card transactions immediately, reconciling them ensures you capture any purchases, fees, and payments made on time. This process is foundational for businesses that rely on credit cards for regular purchases.

Intercompany reconciliation

This helps you confirm that transactions between your business’s multiple subsidiaries are consistent in all financial statements. It can involve complex transactions such as intercompany loans or shared expenses, and it helps eliminate duplicated revenue or expenses on your consolidated financial statements.

Accounts payable and accounts receivable reconciliation

Vendor reconciliation matches your accounts payable to your vendor statements, while accounts receivable reconciliation ensures you accurately record customer payments. These help you manage cash flow properly and correctly document incoming and outgoing payments.

Month-end reconciliation

At the close of the accounting period, this confirms you’ve accounted for all transactions and that your statements are accurate before the financial close. It ensures you reconcile financial institutions' records, including bank balances and credit card statements, before reporting them on the balance sheet.

How to reconcile a balance sheet

Reconciling the balance sheet involves comparing balance sheet accounts, such as assets, liabilities, and equity, with supporting documentation, such as bank records, vendor invoices, or internal records. That way, everything recorded in the financial accounts accurately reflects your company's financial position.

In the case of liabilities, reconciling the accounts payable and vendor statements means you’ve captured all outstanding debts. Similarly, reconciling assets such as accounts receivable helps you confirm you’ve accurately tracked and reported all customer payments.

If you identify discrepancies such as missing transactions, timing differences, or errors in journal entries, correct your entries so your balance sheet accounts align with actual transactions. This guarantees your financial reporting’s integrity and accuracy.

The importance of regular reconciliation

Regular reconciliation helps you maintain financial accuracy. Without it, you risk reporting errors that could impact everything from cash flow management to investor trust. Regular reconciliation helps you:

• Identify and correct errors quickly before they snowball into larger issues
• Confirm financial information is up-to-date and reflects the true financial position of your company
• Support internal controls by flagging discrepancies before they affect your financial statements and general ledger accounts
• Improve bookkeeping efficiency and reduce the time needed to close the accounting period, especially with automation tools

How automation and accounting software help

Accounting software and automation tools can significantly improve the account reconciliation process. These tools automatically pull bank transactions and credit card statements and match them with general ledger accounts, reducing the need for manual data entry.

Here’s how automation benefits the reconciliation process:

Tools such as ERP systems and accounting software such as Ramp, NetSuite, and QuickBooks offer automated solutions to streamline reconciliation for bank accounts, credit card accounts, and even accounts payable and accounts receivable.

Common challenges in reconciliation

Several challenges in account reconciliation may arise. By addressing these challenges proactively, you can maintain accurate financial records and avoid costly errors, leading to more accurate financial statements and improved decision-making. Challenges include:

Step-by-step guide to the reconciliation process

Follow these steps to reconcile your accounts effectively and ensure accurate financial reporting:

1. Gather documents

Before you begin, collect all the necessary source documents to ensure you have the most accurate information for your reconciliation. This includes:

• Bank statements: Your bank statement for the period being reconciled, which shows all transactions that have been processed through the bank account
• Credit card statements: If you’re reconciling credit card transactions, gather the credit card statements to ensure all charges are recorded
• Vendor invoices: For accounts payable reconciliation, collect any outstanding vendor invoices to compare with your accounts payable records
• Receipts and bills: For accounts receivable reconciliation, gather any receipts from customers or bills issued that have yet to be paid
• Internal records: Ensure you have access to your general ledger accounts and any other financial records that track your transactions

Make sure you have these documents organized and ready for comparison with your internal records.

2. Compare balances

Once you’ve gathered all your documents, compare the ending balance from your bank statements with the ledger balance from your general ledger accounts. Here’s how to do this effectively:

• Bank balance vs. ledger balance: Start by looking at the bank balance at the end of the period on your bank statement and compare it with the ledger balance in your financial records—for example, your cash account or accounts receivable
• Identify any differences: If there’s a difference, check if it’s due to timing differences—a check written late in the period or a deposit that hasn’t cleared yet—or unrecorded transactions
• Document discrepancies: If any appear, note them for further investigation. Discrepancies might include overdrafts, bank fees, or charges you haven't recorded in your internal accounts yet.

3. Identify discrepancies

After comparing your balances, identify any discrepancies. Common ones include:

• Missing transactions: These could be transactions recorded in the bank account that you haven’t posted to your general ledger accounts, such as unrecorded deposits or checks
• Bank fees and charges: Sometimes, you record bank fees—transaction fees or monthly service charges—on the bank statement but not in the internal records
• Timing differences: A common occurrence in reconciliation is the timing difference between when a transaction appears on the bank statement versus when it’s recorded in the financial records, such as a check written on the last day of the month but not processed until the following month
• Duplicate entries: Entries recorded twice—payments or deposits—could cause discrepancies
• Errors in journal entries: Manual data entry mistakes could also cause discrepancies, such as typing the wrong amount or posting to the wrong account

Carefully review each transaction to determine the cause of any differences.

4. Verify supporting documentation

To resolve any discrepancies, be sure to match every transaction in the bank statement with supporting documentation. This includes:

• Receipts: Verify that every payment listed in the bank statement has corresponding supporting documentation, such as receipts or invoices, to confirm it was properly recorded
• Vendor invoices: Account for all vendor invoices, and confirm the accounts payable balances match your records
• Customer payments: For accounts receivable, check that your accounting system reflects all payments from customers

If you find discrepancies that are difficult to resolve, contact your bank or vendor for clarification and gather any additional documentation to support your reconciliation.

5. Adjust records

Once you’ve identified the discrepancies and verified the supporting documentation, the next step is to adjust your financial records:

• Record unprocessed transactions: If you identified any unrecorded transactions, such as bank fees or overdraft charges, record these in your accounting system. This will bring your general ledger accounts in line with your actual bank transactions.
• Correct errors in journal entries: If you identified mistakes in journal entries, such as incorrect amounts or accounts, correct these entries in the general ledger to match the actual transaction
• Account for timing differences: If you’ve found some, note them and adjust for them in the next period’s reconciliation or accounting entries. For example, if a check written on the last day of the month doesn’t clear until the next period, mark it as a timing difference but make sure it’s noted for future reconciliation.
• Adjust balance sheet accounts: If you find discrepancies in balance sheet accounts such as accounts payable or accounts receivable, adjust them to reflect the accurate balances

After you’ve made these adjustments, the balance between the bank statement and general ledger accounts should align.

6. Double-check your work

Before finalizing the reconciliation, double-check all entries and adjustments:

• Verify calculations: Check that all mathematical calculations are correct, especially when adjusting for discrepancies
• Cross-check documents: Revisit the supporting documentation for every transaction to ensure it’s accurate and complete
• Review timing differences: Make sure you haven’t overlooked any transactions affected by timing differences, and confirm that you’ll resolve them in the next period

Best practices for effective reconciliation

To ensure an efficient and accurate reconciliation process, follow these best practices:

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 such as receipt collections and expense categorization—saving time and reducing human error
• Intelligent assistance: Ramp 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 so you can focus on growing your business.‍

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.