Account reconciliation is the process of comparing transactions you have recorded using internal record-keeping for financial accounts against monthly statements from external sources such as a bank, credit card company or other financial institution, to ensure that your account records agree with each other.
If you're not using accounting software, your financial transactions would likely be in a physical check register that you keep updated each time you write a check, statements from your credit card companies and your bank statement for debit transactions.
If you're using accounting software to print batches of checks each time the company pays bills, your transaction records show in your software's account register.
Why Reconcile Your Accounts?
Comparing transactions and balances is important because it avoids overdrafts on cash accounts, catches fraudulent or over-charged credit card transactions, explains timing differences and highlights other negative activity such as stolen or incorrectly-recorded income and expense entries.
This will save your company from paying overdraft fees, help catch improper spending and serious issues such as embezzlement before they get out of control, and keep transactions error-free.
Reconciling accounts and comparing transactions also helps your accountants produce reliable, accurate and high-quality financial statements. Since your company balance sheet reflects all money spent, whether cash, credit or loans, and all assets purchased with those funds, the balance sheet accuracy strongly depends on the accurate reconciliation of your company's financial accounts.
Publicly-held companies must keep their accounts consistently reconciled or risk being penalized by independent auditors. Many companies have systems for maintaining payment receipts, account statements, and other data necessary to document and support account reconciliations.
The Reconciliation Process
When you use accounting software to reconcile accounts, the software does some of the work for you, saving you a good deal of time. However, the process still needs human involvement to capture certain transactions that may have never entered the accounting system, such as cash stolen from a "petty cash" box, for example.
- Compare your internal account register to your bank statement and check off each payment and deposit on your register that matches the statement. Make note of all transactions on your bank statement for which you don't have any other evidence, such as a payment receipt or check stub.
- Identify any money shown as paid out in your internal records, whether checks, ATM transactions or other charges, that do not show up as a paid amount on the bank account statement. Subtract these items from the bank statement balance. Conversely, also note charges on the bank statement that you haven't captured in your internal accounting records. Charges to watch for include uncleared checks, internally-recorded auto-payments that have yet to clear the bank account, check-printing fees, ATM service charges and other bank charges such as insufficient funds (NSF), overdraft or over-the-limit fees.
- Check that all funds coming into the company have been reflected in both your internal records and your bank account. Find any deposits and account credits that haven't been recorded by the bank yet and add these to the statement balance. If the bank shows money deposits not reflected in your internal books, make the entries. If you have an interest-bearing account and you are reconciling a few weeks after the statement date, you may need to add interest as well.
- Bank errors don't occur very often, but if any errors were made, the proper amount needs to either added or subtracted from your account balance, and you should contact the bank immediately to report the error.
- Your bank statement balance should now equal the balance in your records. Depending upon the number of discrepancies, you may need to create a supporting schedule that details out the differences between the internal and bank accounts.
To learn more, check out our short tutorial: A Step by Step Guide to Balancing Checking Accounts.