What Is Account Reconciliation?

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 Does Reconciling an Account Involve?

Account reconciliations are 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 reconciliations are 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

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.

Pros

Cons

Manual

Control and Customization: Manual processes allow tailored approaches to unique reconciliation needs and provide hands-on control over every step.

Time-Consuming: The manual process can be labor-intensive, requiring significant time to gather documents, compare records, and resolve discrepancies.

Flexibility: Accounting teams can address specific, non-standard transactions and exceptions more intuitively.

Error-Prone: Human error is more likely, which can lead to inaccuracies and the need for additional corrections.

Limited Scalability: Manual reconciliation becomes less feasible as transaction volumes grow, straining resources and efficiency.

Automated

Efficiency: Automation significantly speeds up the reconciliation process, allowing for quicker identification and resolution of discrepancies.

Initial Cost and Setup: Implementing an automated system can involve a significant initial investment and setup time.

Accuracy: Automated systems reduce the risk of human error, ensuring more accurate financial records.

Dependence on Technology: Relying on automation means that technical issues or software failures can disrupt the reconciliation process

Scalability: Automated reconciliation can handle large volumes of transactions with ease, making it ideal for growing businesses.

Standardization: Automated systems may struggle with non-standard transactions or exceptions that require human judgment.

Real-Time Monitoring: Many automated solutions offer real-time updates and monitoring, providing timely insights into financial health.

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.