Reconciling Account Overview, Process, How It Works
Reconciliation serves an important purpose for businesses and individuals in preventing accounting errors and reducing the possibility of fraud. Businesses and individuals may use account reconciliation daily, monthly, quarterly, or annually. Accounting software automation and adding a procure-to-pay software, like PLANERGY, can streamline the process and increase functionality by automatically accessing the appropriate financial records. Using the bank reconciliation example above, if your spending doesn’t take into account the $12,000 in outstanding checks, you can easily overspend available funds. Debits and credits are truly the backbone of the double-entry accounting system, which states that every debit entry must have a corresponding credit entry for the books to remain in balance. In both cases where mistakes are identified as a result of the reconciliation, adjustments should be undertaken in order for the account balance to match the supporting information.
Common Challenges in Account Reconciliations and How to Solve Them
- Account reconciliation is typically carried out at the end of an accounting period, such as monthly close, to ensure that all transactions have been accurately recorded and the closing statements are correct.
- It makes sure that fixed asset and accumulated depreciation balances accurately offset each other in the general ledger.
- This process involves reconciling credit card transactions, accounts payable, accounts receivable, payroll, fixed assets, and subscriptions to ensure that all are properly accounted for and balanced.
- Whether it’s reconciling bank statements, vendor accounts, or intercompany transactions, each type plays a pivotal role in ensuring that records are consistent and errors are promptly identified and corrected.
- The primary objective of reconciliation is to identify and resolve any discrepancies between the two sets of records.
A $900 error should be noted during the reconciliation, and an adjusting journal entry should be recorded. Income tax liabilities are reconciled through a schedule to compare balances with the general ledger. This is true for both businesses and individuals, who should both verify every transaction individually, making sure the amounts match perfectly, and, if not, making note of any differences that need further investigation. Account reconciliation should be prepared and carried out by qualified accounting personnel, typically within the finance department. Ideally, it should be someone who is not involved in the day-to-day transactions that performs it to maintain objectivity and ensure a thorough review. Stripe offers a powerful reconciliation solution that streamlines the process for businesses.
Revenue Recognition
Meanwhile, a construction company dealing with equipment and material costs may choose quarterly reconciliations to guarantee their financial processes operate smoothly. The first step in bank reconciliation is to compare your business’s record of transactions and balances to your monthly bank statement. Make sure that you verify every transaction individually; if the amounts do not exactly match, those differences will need further investigation. A common example of account reconciliation is comparing the general ledger to sub-ledgers, such as accounts payable or accounts receivable.
For the current year, the company estimates that annual revenue will be $100 million, based on its historical account activity. The company’s current revenue is $9 million, which is way too low compared to the company’s projection. An investigation may determine that the company wrote a check for $20,000, which still needs to clear the bank. In this case, a $20,000 timing difference due to an outstanding check should be noted in the reconciliation. Timing differences occur when the activity that is captured in the general ledger is not present in the supporting data or vice versa due to a difference in the timing in which the transaction is reported. Depending on your business, you may also want to reconcile your inventory account, which is typically completed by doing a complete accounting of all inventory on hand.
Cash equivalents
For instance, while performing an account reconciliation for a credit card clearing account, it may be noted that the general ledger balance is $260,000. Still, the supporting documentation (i.e., credit card processing statement) has a balance of $300,000. Further analysis may reveal that multiple transactions were improperly excluded from the general ledger but were adequately included in the credit card processing statement. For example, a grocery store dealing with daily cash transactions relies on daily cash reconciliations to manage cash flow effectively. In contrast, a consulting firm may find that monthly reconciliations for invoices and expenses are depreciation conventions enough.
In this section, we look at some examples of accounts reconciliation to understand the scope of work involved in accounts reconciliation and the tools that can help ease the process. Automated reconciliation also flags discrepancies so they can be investigated immediately rather than months later. The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accurateness, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent attorney or accountant licensed to practice in your jurisdiction for advice on your particular situation.
By comparing internal financial statements with external sources, such as bank statements, businesses can identify discrepancies, correct errors, and maintain financial integrity. Reconciliation in accounting is the process of making sure all the numbers in your accounting system match up correctly. For example, when reconciling your bank statement with your company’s ledger, bank reconciliation means comparing every transaction to make sure they match. In essence, reconciliation acts as a month-end internal control, making sure your sets of records are error-free. Stripe’s reconciliation process involves comparing your business’s internal records, such as invoices, with external records like settlement files, payout files, and bank statements.
While scrutinizing the records, the company finds that the rental expenses for its premises were double-charged. The company lodges a complaint with the landlord and is reimbursed the overcharged amount. In the absence of such a review, the company would’ve lost money due to a double-charge. An investigation may determine that the company recorded bank fees of $1,000 rather than $100.
Once any differences have been identified and rectified, both internal and external records should be equal in order to demonstrate good financial health. For example, the internal record of cash receipts and disbursements can be compared to the bank statement to see if the records agree with each other. The process of reconciliation confirms that the amount leaving the account is spent properly and that the two are balanced at the end of the accounting period.
