What is Account Reconciliation: Process, Example and Types

Companies with single-entry bookkeeping systems can perform a form of reconciliation by comparing invoices, receipts, and other documentation against the entries in their books. HighRadius’ comprehensive AI-powered Record to Report suite allows you to streamline and improve your business’s account reconciliationprocesses. By leveraging our Account Reconciliation Software, you can utilize out-of-the-box AI transaction matching rules to automate the reconciliation process and achieve almost 95% journal posting automation. 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 understanding current assets on the balance sheet be a significant step toward streamlining your financial operations.

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. For lawyers, reconciliation in accounting is essential for ensuring that financial records are accurate, consistent, and transparent. While proper reconciliation is the standard for how law firms should handle all financial accounts, it is particularly important—and often required—for the management of trust accounts. Take note that you may need to keep an eye out for transactions that may not match immediately between the sets of records for which you may need to make adjustments due to timing differences. For example, a transaction that may not yet have cleared the trust bank account could be recorded in the client ledger, but may not yet be visible on the trust account bank statement.

This helps to ensure that all credit card transactions have been accurately recorded in the business’s financial records. Account reconciliation is necessary for asset, liability, and equity accounts since their balances are carried forward every year. 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. The balances between the two records must agree with each other, and any discrepancies should be explained in the account reconciliation statement.

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. This reconciliation involves rolling forward fixed asset balances, accounting for purchases, sales, retirements, and accumulated depreciation.

Individuals should reconcile bank and credit card statements frequently to check for erroneous or fraudulent transactions. After 60 days, the Federal Trade Commission (FTC) notes, they will be liable for „All the money taken from your ATM/debit card account, and possibly more—for example, money in accounts linked to your debit account.“ A common example of account reconciliation is comparing the general ledger to sub-ledgers, such as accounts payable or accounts receivable. This ensures that all transactions are recorded accurately and any discrepancies are identified and corrected.

Types of Reconciliation

1. And if you never reconcile your accounts, chances are that fraudulent activity will continue.
2. A three-way reconciliation is a specific accounting process used by law firms to check that the firm’s internal trust ledgers line up with individual client trust ledgers and trust bank statements.
3. Using accounting software will make it much easier to reconcile your balance sheet accounts regularly.
4. Other reconciliations turn non-GAAP measures, such as earnings before interest, taxes, depreciation, and amortization (EBITDA), into their GAAP-approved counterparts.

For example, a company can estimate the amount of expected bad debts in the receivable account to see if it is close to the balance in the allowance for doubtful accounts. The expected bad debts are estimated based on the historical activity levels of the bad debts allowance. The frequency of your reconciliation process can be determined by the size and type of business. Larger businesses with several branches may also need to complete intercompany reconciliations. Balance sheets and profit and loss statements are both essential resources for determining the financial health of your business.

What is a three-way trust reconciliation?

Reconciliation serves an important purpose for businesses and individuals in preventing accounting errors and reducing the possibility of fraud. Banks and retailers can make errors when counting money and issuing cash to customers as change. Variances between expected and actual amounts are called „cash-over-short.“ This variance account is kept and reconciled as part of the company’s income statement. Businesses and individuals may use account reconciliation daily, monthly, quarterly, or annually. Account reconciliation is a crucial function in business accounting that helps address several fundamental objectives in the accounting process.

What is reconciliation in accounting?

Regular account reconciliation should be combined with invoice reconciliation as part of your internal controls in accounts payable. Using the bank reconciliation example above, if your spending doesn’t take into account the $12,000 in outstanding checks, you can easily overspend available funds. Invoice reconciliation also compares two sets of documents for accuracy, but instead of ending balances, you’re comparing invoice details against a hard copy.

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. 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.