For example, if you run a small retail store, you may keep a point-of-sale ledger, or similar software, that records daily transactions, inventory, and in-store balances. You’ll also have an external bank account that tracks deposits, purchases, and long-term balances. When you compare the two, you can look for any discrepancies in cash flow for a certain time frame. 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.
How Does Account Reconciliation Work?
When you use accounting software to reconcile accounts, the software does most 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. These steps will help you make sure all of your money is accounted for.
Compare Both Records Side-by-Side
Your first step to prepare for a thorough account reconciliation is to compare your internal account register to your bank statement. Go through and check off each payment and deposit on your register that matches the statement. Make a 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.
Check Outgoing Funds
Check that all outgoing funds have been reflected in both your internal records and your bank account. Whether it’s checks, ATM transactions, or other charges, subtract these items from the bank statement balance. Note charges on your bank statement that you haven’t captured in your internal records. Charges to watch for include uncleared checks, internally recorded auto-payments that haven’t cleared the bank account, check-printing fees, ATM service charges, and other bank charges such as insufficient funds (NSF), overdrafts, or over-limit fees.
Check Incoming Funds
Check that all incoming funds have been reflected in both your internal records and your bank account. Find any deposits and account credits that haven’t yet been recorded by the bank 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.
Check for Bank Errors
Bank errors don’t occur very often, but if they do, the proper amount needs to be added or subtracted from your account balance, and you should contact the bank immediately to report the error.
Make Sure the Balances Are Accurate
Your bank statement balance should now equal the balance in your records. Depending on the number of discrepancies, you may need to create a supporting schedule that details the differences between your internal books and bank accounts.
Benefits of Account Reconciliation
Comparing transactions and balances is important because it helps to avoid overdrafts on cash accounts, catches fraudulent or overcharged credit card transactions, explains timing differences, and highlights other negative activity, such as theft or incorrectly recorded income and expense entries. This saves your company from paying overdraft fees, keeps transactions error-free, and helps catch improper spending and issues such as embezzlement before they get out of control. Reconciling accounts and comparing transactions also helps your accountant produce reliable, accurate, and high-quality financial statements. Because your company balance sheet reflects all money spent—whether cash, credit, or loans—and all assets purchased with those funds, the accuracy of the balance sheet strongly depends on the accurate reconciliation of your company’s financial accounts.
