Many businesses and individuals reconcile their accounts to ensure that they are in excellent financial shape. Reconciling your accounts is an excellent approach to spotting fraudulent charges or inconsistencies in the monetary system across all of your bank accounts.
In this post, we'll define account reconciliation, go over the different methods of doing it, and show you how to do account reconciliation process.
What Is Account Reconciliation?
In the accounting profession, account reconciliation is the process of reconciling internal financial data with external monthly statements to ensure that they are in agreement.
Account Reconciliation Example
An example of account reconciliation is if you spent $20 on stationery, check to ensure that not only was $20 spent on the stationery, but that $20 also left your account and was reported on your bank statement. You can check this by comparing the amount charged on your store receipt to the amount charged on your bank statement.
Reconciliation ensures that the actual amount of money spent corresponds with the amount shown leaving an account at the end of a financial year. The purpose of account reconciliation is to check for mistakes or fraudulent activity.
Why Should You Reconcile Accounts?
The main purpose of account reconciliation is to help you to know how much money you have and where you spent it. If your accounts have any overdrafts, overcharges, or incidences of fraud, it's preferable to find out as quickly as possible. This could help you save money in the long run.
If you hire an accountant, reconciling your accounts will make it easier for them to prepare accurate financial statements. Account reconciliation is similarly crucial if you own a business, because it ensures that your balance sheet is accurate.
Account Reconciliation Methods
Whether you're performing account reconciliation as an individual or for your company, the process will need to be done on a routine, regular basis to avoid financial discrepancies.
The two methods of account reconciliation are as follows:
1. Documentation review
Document review is the most commonly used method of account reconciliation, and it entails going over all the documents to make sure the amount spent matches the amount reported. Account reconciliation software is frequently used for this method. For instance, after reviewing the papers, you may discover that your landlord overcharged you for rent. After then, you can talk to your landlord about getting reimbursed for the money you were overcharged. You would not have known that the rent was overcharged unless you used documentation review.
2. Analytics review
The analytics review method estimates the amount that should be reflected in the account by gauging past account activity levels or historical activity levels.
Your company, for example, expects $50,000 in annual income based on historical account behavior. Your company's current revenue, however, is $5,000, which is far less than what was projected. Let's imagine an accountant discovered a discrepancy in the data. The accounts would be balanced if this was changed to reflect a lot closer — or correct — revenue.
What Causes Account Reconciliation Discrepancies?
During the account reconciliation procedure, discrepancies may be discovered. They can be caused by a number of things, including variations in timing (timing differences), missing transactions, or typos (errors).
1. Timing Differences
It's possible that action is recorded in the general ledger but not in the supporting data, or vice versa, due to a time difference. When performing an account reconciliation for a cash account, for example, it may be noted that the general ledger balance is $100,000, but the supporting documentation (such as a bank statement) indicates that the bank account has a balance of $110,000.
Following further investigation, it was discovered that the Company had written a $10,000 check that had not yet cleared the bank. As a result, the reconciliation should note a $10,000 timing difference due to an outstanding check.
2. Missing Transactions
It's possible that activity is recorded in the general ledger but not in the supporting data, or vice versa, due to missing transactions. When performing an account reconciliation for a credit card receivable account, for example, it may be noted that the general ledger balance is $180,000, but the supporting documentation (i.e., credit card processing statement) shows a balance of $200,000.
After further investigation, it was identified that four transactions were improperly excluded from the general ledger but were correctly included in the credit card processing statement, according to further investigation. As a result, the reconciliation should note a $20,000 discrepancy due to the missing transactions, and an adjusted journal entry should be made.
A disparity between the general ledger and the supporting data may occur in some cases due to a mistake or error. When doing an account reconciliation for a cash account, for example, it may be noticed that the general ledger balance is $149,000, but the supporting paperwork (i.e., a bank statement) indicates that the bank account is $149,900.
Following additional investigation, it was discovered that the company had reported $1,000 in bank fees rather than $100. As a result, a $900 error should be recorded in the reconciliation, along with an adjusted journal entry.
How To Perform Account Reconciliation
The account reconciliation process is necessary to ensure that the amount of money leaving your account matches the amount spent. By the end of the accounting period, both sums should be equal.
Knowing how to do account reconciliation is essential for detecting possible theft or fraudulent transactions. Use account reconciliation software to streamline the process
You will be in better financial shape as soon as you've figured out how to balance these books. The steps for account reconciliation process are as follows:
1. Make a comparison between your records and your bank statement
First and foremost, you'll need both internal and external records. Once you've got them, go over them to see if there are any discrepancies in the transactions. For instance, if you spent $100 on groceries, you'll want to see the same amount in your bank account, and vice versa. To correct any inaccuracies, evidence will be required. The documentation acts as proof in this situation.
2. Identify any discrepancies
To spot a discrepancy, look for charges on your receipt that aren't reflected in your bank account, and vice versa. Make sure that the money that leaves your account and the one that is spent are both noted on both records. A discrepancy is indicated if you notice any instances where a balance was reflected on one but not the other. To correct any discrepancies, you must enter the correct transactions into both records.
An error has happened if, for example, you purchased a new book and the charge appears on your receipt but not on your bank statement. However, if the charge appears on both your receipt and the bank statement, the two are in balance, and the account is reconciled. You can do this for all your transactions.
Furthermore, some charges will take longer to appear on your bank statement, so it's important to allow enough time for the charges to appear on your statement before you proceed.
It's possible that the mistake might be from your bank, albeit this isn't usually the case. The errors could include duplication, omissions, and erroneous reporting. Any of this could result in both records being deemed imbalanced. Such errors in the records should be updated to reflect the right amount. In this case, don't be hesitant to phone the vendor or company to double-check the charge.
3. Balance the records
Once you've examined the external and internal financial documents and corrected any differences, you've balanced both accounts and so achieved account reconciliation. This indicates that you or your company is in good financial shape.