What Is Account Reconciliation? Your Essential Guide to How It’s Done and More

Account reconciliation in accounting involves comparing two sets of records to ensure figures match. The source documents are usually internal records generated by the company or external records from third parties. This process ensures consistency between a company’s general ledger and its sub-ledgers, helping to identify discrepancies that might indicate fraud or theft.

Companies vary in how often they perform account reconciliations, which can be daily, monthly, or annually, depending on transaction volume. Due to its tedious nature, many organizations use accounting software to automate reconciling accounts, allowing them to focus on strategic priorities.

Read on to learn about the following:

• What Is Account Reconciliation?
• Accounting Reconciliation Examples and Types
• Why Accounting Reconciliation Matters For Business
• 8 Benefits of Account Reconciliation
• What Does Reconciling an Account Involve?
• How to Reconcile Accounts
• The Account Reconciliation Process in 8 Steps
• Manual vs. Automated Accounts Reconciliation
• Key Challenges of Account Reconciliation
• 8 Causes of Account Reconciliation Discrepancies
• 8 Best Practices For Account Reconciliation
• CPM Tools You Can Use For Account Reconciliation
• OneStream Aligns Account Reconciliations with Financial Reporting
• OneStream’s Account Reconciliation Solution Speeds Up the Process
• Improve Reconciliation in Accounting With OneStream
• FAQs About Account Reconciliation

What Is Account Reconciliation?

Account reconciliation, by definition, is the process of ensuring financial statement account balances are correct at the end of an accounting period. It’s a process that uses two sets of records to ensure figures are correct and in agreement. And if they are not in agreement, making necessary adjustments or identifying and explaining differences.

Account Reconciliation Examples and Types

Here are the main types and examples of account reconciliation that businesses normally perform to keep their books in order:

• Bank Reconciliation: Ensures that the company’s financial records match the bank’s records for cash transactions.
• Vendor Reconciliation: Compares company records of purchases and payments with vendor statements.
• Customer Reconciliation: Verifies that accounts receivable records match the customer’s account statements.
• Intercompany Reconciliation: Ensures consistency between transactions in the financial records of different subsidiaries within the same company.
• Credit Card Reconciliation: Matches company records of credit card transactions with the credit card statement.
• Fixed Asset Reconciliation: Compares the company’s fixed asset register with the general ledger to ensure accurate recording of assets.
• Balance Sheet Reconciliation: Ensures that all accounts on the balance sheet are accurate and supported by detailed schedules and records.

Why Account Reconciliation Matters For Business

Account reconciliation is vital for businesses because it ensures the accuracy and integrity of financial records. By regularly comparing internal records with external statements, companies can identify and rectify discrepancies early on, preventing potential issues like fraud, errors, or misappropriation of funds. This process not only helps in maintaining trust with stakeholders but also ensures compliance with regulatory requirements.

Moreover, accurate reconciliation provides a clear financial picture, aiding in better decision-making and strategic planning. It enables businesses to manage cash flow effectively, assess financial health, and prepare accurate financial statements. Account reconciliation is fundamental for maintaining financial stability and supporting informed business growth.

8 Benefits of Account Reconciliation

Reconciliation in accounts offers several benefits that are crucial for the financial health and operational efficiency of a business:

1. Accuracy in Financial Records: Account reconciliation ensures that financial statements are accurate and reflect the true financial position of the business. This accuracy helps in making informed decisions and planning for the future.
2. Fraud Detection and Prevention: By regularly reconciling accounts, businesses can identify discrepancies that may indicate fraudulent activities or errors, allowing them to take corrective measures promptly.
3. Regulatory Compliance: Accurate and timely reconciliation in accounting helps businesses comply with regulatory requirements, reducing the risk of penalties and legal issues.
4. Cash Flow Management: Account reconcilement helps monitor cash flow by ensuring that all transactions are recorded correctly and that there are no unexpected shortfalls or overages.
5. Enhanced Financial Planning: With precise financial data, businesses can create more reliable budgets, forecasts, and financial plans, aiding in strategic decision-making.
6. Improved Operational Efficiency: Automating the account reconciliation process can save time and reduce manual errors, allowing the finance team to focus on more strategic tasks.
7. Increased Stakeholder Confidence: Accurate and transparent financial records enhance trust and confidence among investors, creditors, and other stakeholders.
8. Internal Control: Regular account reconciliation is an internal control measure that ensures all transactions are authorized and recorded correctly.

What Does Reconciling an Account Involve?

Account reconciliation is typically performed after the close of a financial period. Accountants review each account in the financial statements and verify that the balance listed is accurate. This often involves comparing the financial statement balance to another source of information – for example, comparing the balance for the Cash account to an external bank statement.

Other examples of critical accounts that require reconciliation include:

• Cash and Investments – comparing to external bank and investment accounts
• Accounts Receivable – comparing to the AR sub-ledger
• Accounts Payable – comparing to the AP sub-ledger
• Prepaid Expenses – listing the components of the account balance
• Accrued Liabilities – listing the components of the account balance
• Intercompany Payables and Receivables – ensuring they eliminate during consolidation
• Fixed Assets – listing the components or tying out to a sub-ledger

Account reconciliation is performed to ensure consistency and accuracy in financial reporting. They are especially important and a key internal control for publicly held companies that must report financial results to external stakeholders. Detailed audit trails are available to back up all account balances.

How to Reconcile Accounts

As mentioned, the account reconciliation process is essential for ensuring the accuracy and integrity of your financial records. Most companies today rely on accounting reconciliation software to track transactions and address discrepancies between their books and financial statements.

The Account Reconciliation Process in 8 Steps

When done manually, reconciling accounts requires meticulous attention to detail to avoid errors. Here’s an overview of the usual steps involved in this process:

1. Gather Documents

Collect internal records (general ledger, sub-ledgers) and external records (bank statements, vendor invoices).

2. Compare Records

Match transactions from internal records with external records to identify discrepancies.

3. Identify Discrepancies

Note any differences between the records and investigate the reasons behind them.

4. Make Adjustments

Correct errors in the records, such as missed entries or incorrect amounts.

5. Document Findings

Record any discrepancies and the adjustments made to resolve them.

6. Reconcile Accounts

Ensure that the adjusted records match and balance each other.

7. Review and Approve

Have a second party review the reconciliation for accuracy and completeness.

8. File and Report

Keep a record of the reconciliation process and report the findings to relevant stakeholders.

Account Reconciliation Template

A basic account reconciliation template usually includes the following sections:

1. Account Information:

• Account Name
• Account Number
• Date Range for Reconciliation

2. Opening Balances:

• Beginning balance as per the previous reconciliation

3. Transactions/Adjustments:

• List of transactions or adjustments made during the reconciliation period

4. Closing Balances:

• Ending balance as per the current reconciliation

5. Discrepancies/Notes:

• Explanation of any discrepancies found during reconciliation
• Notes on adjustments made

6. Reviewer/Approver:

• Name and signature of the person who reviewed or approved the reconciliation

7. Date:

• Date of the reconciliation

This template helps ensure that all transactions are properly accounted for and that the balances match across different sets of records. You can customize this template based on the specific needs and complexities of your business's accounting practices.

Manual vs. Automated Accounts Reconciliation

The two basic accounting methods are manual and automated reconciliation.

Manual reconciliation involves comparing and matching transactions and balances by hand, often using spreadsheets or accounting ledgers.

Automated reconciliation, on the other hand, utilizes software and technology to match transactions automatically based on predefined rules and criteria, significantly reducing the time and effort required compared to manual methods.

Let’s compare the advantages and disadvantages of manual vs. automated account reconciliation.

While manual reconciliation provides control and flexibility, it could be more efficient and prone to errors. Automated reconciliation, on the other hand, enhances efficiency and accuracy, making it better suited for handling large volumes of transactions and enabling real-time financial monitoring.

Key Challenges of Account Reconciliation

There are several challenges to performing account reconciliations, especially in a large, global enterprise. One of the biggest challenges is the sheer number of accounts to be reconciled. This can range from hundreds to thousands of accounts across the parent and various subsidiaries of a global enterprise. Also related is the need to reconcile data between multiple software applications used to run the business. The more systems, the more reconciliation that’s required.

For large and small to mid-sized organizations, timing issues are a key challenge, most often in areas such as bank deposits and payments to vendors. If account reconciliations are being performed during the period-end close process, it can also be challenging to reconcile data changing day-to-day or hour-to-hour during the close. Prioritizing which accounts need to be reconciled, based on materiality, is another challenge in larger enterprises, as is gaining the appropriate reviews and approvals and ensuring an adequate audit trail for account reconciliations.

Addressing the challenges below requires robust processes, automation where possible, and advanced account reconciliation tools to ensure accurate and timely financial reporting. Let’s look at some of the problems:

• Manual Processes: Relying on manual methods can lead to errors and inefficiencies, especially in reconciling large volumes of transactions.
• Data Accuracy: Ensuring data accuracy from various sources and systems can be challenging, leading to discrepancies.
• Timeliness: Meeting deadlines for reconciliation can be difficult, especially with complex transactions and multiple accounts.
• Complexity: Dealing with complex financial transactions and reconciling intercompany accounts can pose significant challenges.
• Regulatory Compliance: Ensuring compliance with regulatory requirements and internal policies adds complexity to the reconciliation process.
• Audit Trails: Maintaining clear audit trails to trace errors and discrepancies is crucial but time-consuming.
• Integration Issues: Integrating data from different systems and platforms can be complex and may lead to reconciliation challenges.

8 Causes of Account Reconciliation Discrepancies

Understanding the causes of account reconciliation discrepancies is crucial for maintaining the accuracy and integrity of financial records in any organization. By addressing these underlying causes with effective controls and processes, organizations can ensure that their financial statements reflect true and reliable information, supporting informed decision-making and compliance with regulatory requirements.

1. Data Entry Errors: Data entry or manual input mistakes can lead to record discrepancies.
2. Timing Differences: Transactions recorded in different accounting periods or at different times can cause discrepancies if not properly synchronized.
3. Missing Transactions: Overlooking or omitting transactions during reconciliation can result in discrepancies.
4. Bank Errors: Discrepancies may arise from errors banks or financial institutions make in processing transactions.
5. System Glitches: Technical issues or bugs within accounting systems or software can sometimes lead to incorrect data.
6. Currency Conversion Issues: For multinational companies, discrepancies can occur due to currency exchange rate fluctuations and conversion errors.
7. Intercompany Transactions: Complexities in reconciling transactions between different entities within the same organization can lead to discrepancies.
8. Fraudulent Activities: Intentional manipulation or fraudulent activities can result in discrepancies aimed at concealing unauthorized transactions.

8 Best Practices For Account Reconciliation

Implementing these eight best practices can help organizations maintain accurate financial records, improve operational efficiency, and mitigate risks associated with account reconciliation.

1. Regular Reconciliation: Perform reconciliations frequently, whether daily, weekly, or monthly, depending on transaction volumes and business needs.
2. Documentation: Maintain clear documentation of account reconciliation procedures, including step-by-step processes and responsibilities of each team member involved.
3. Automation: Utilize accounting software or tools to automate reconciliation processes where possible, reducing manual errors and saving time.
4. Segregation of Duties: Ensure that different individuals are responsible for initiating transactions, recording them, and reconciling accounts to enhance accuracy and accountability.
5. Review and Approval: Implement a review and approval process for reconciliations by management or a designated reviewer to verify accuracy before finalization.
6. Identify Discrepancies: Promptly investigate and resolve any discrepancies found during reconciliation to prevent potential financial inaccuracies or fraud.
7. Training and Education: Train accounting staff on reconciliation processes, software usage, and best practices to enhance proficiency and efficiency.
8. Internal Controls: Establish robust internal controls, including periodic audits and segregation of duties, to mitigate risks and ensure compliance with regulatory requirements.

CPM Tools You Can Use For Account Reconciliation

There are several types of tools accountants can use to perform account reconciliation.

Prior to the wide availability of PCs and electronic spreadsheet software, an account reconciliation was often performed manually using pencil and paper. The availability of personal computers and spreadsheet software in the early 1980s changed this, and spreadsheets became one of the most popular tools for account reconciliation.

Since the early 2000s, purpose-built software applications for account reconciliation have become available. These software applications can load account balances and transactions from GL/ERP systems, automate manual matching and comparison tasks, and support electronic workflow and approvals.

Purpose-built account reconciliation software applications are available on a standalone basis and can also be implemented as part of an integrated suite of corporate performance management (CPM) applications. These applications typically include financial close and consolidation, reporting, planning, forecasting, analysis, and other capabilities.

FAQs About Account Reconciliation

Why Is Accounts Reconciliation Important?

Account reconciliation is crucial because it ensures the accuracy and integrity of financial records by verifying and matching transactions between different accounts or records. This process helps detect discrepancies, identify errors or fraud, ensure compliance with regulations, and provide a clear view of an organization's financial health.

How Do Accounting Reconciliations Work?

Account reconciliations involve comparing two sets of records, such as bank statements and accounting records, to ensure they match accurately. Automated tools can streamline the process by automatically matching transactions based on predefined criteria, enhancing efficiency and accuracy.

How Often Should a Business Reconcile Its Accounts?

Businesses usually reconcile their accounts on a regular basis, with the frequency depending on the volume of transactions and the organization's specific needs. Many businesses reconcile their accounts monthly as part of the financial close process to ensure accuracy before financial statements are prepared. Some businesses with higher transaction volumes or greater complexity may reconcile more frequently, such as weekly or even daily.