Account reconciliation definition

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What is an Account Reconciliation?

An account reconciliation is the actions taken to prove that an account balance is valid. The concept is most commonly associated with the bank reconciliation, where a company’s recorded cash balance is compared to the bank’s end-of-month bank statement and adjusted as necessary to make the two balances match. It is also a key task to be completed before an organization’s books are audited at the end of each year.

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Advantages of Account Reconciliations

There are multiple advantages to creating account reconciliations. They are as follows:

  • Verification of account accuracy. Account reconciliations should be conducted regularly, to ensure that the account balances appearing in a firm’s balance sheet are correct. If not, a common outcome is for many asset accounts to be overstated, requiring a business to charge off significant amounts at year-end to more accurately align these accounts with reality.

  • Avoidance of overdraft fees. An account reconciliation is especially important for bank accounts, since you might incorrectly assume that a cash balance is higher than is really the case. When this situation arises, companies are more likely to issue check payments and then find that they have overdrawn their accounts, resulting in either overdraft fees or bounced checks.

  • Fraud detection. Account reconciliations are useful for spotting instances of inappropriate purchases. Once identified, management can implement controls to minimize the risk that these expenditures will be made again.

  • Procedure enhancement. Anomalies discovered during an account reconciliation can sometimes be resolved by adjusting the associated accounting procedure. By continually doing this, you can reduce the risk that account anomalies will continue to arise in the future.

Examples of Reconciling an Account

Here are five examples of account reconciliations in a business setting:

  • Bank reconciliation. A business compares its internal cash records with the bank statement to ensure that the balances match. This process involves identifying and adjusting for outstanding checks, deposits in transit, and bank fees to verify the accuracy of the cash balance on the company’s books.

  • Accounts receivable reconciliation. The accounting team reconciles the accounts receivable ledger with the general ledger to ensure that all customer payments and outstanding invoices are accurately recorded. This process helps identify discrepancies, such as unrecorded payments or billing errors.

  • Accounts payable reconciliation. A company reconciles its accounts payable ledger with the general ledger to confirm that all supplier invoices, payments made, and outstanding amounts are accurately reflected. This practice prevents overpayments, duplicate payments, and ensures accurate financial reporting.

  • Inventory reconciliation. Businesses reconcile physical inventory counts with the inventory balances recorded in the accounting system. This process helps identify discrepancies caused by theft, damage, or recording errors and ensures accurate cost of goods sold calculations.

  • Credit card reconciliation. A company compares its internal records of business expenses paid by corporate credit cards with the credit card statements received from the issuer. This process helps detect unauthorized transactions, duplicate charges, or data entry errors.

These examples highlight how account reconciliations help maintain accuracy, detect errors, and ensure the reliability of financial statements.