Account reconciliation definition

/

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.

Related AccountingTools Courses

Bookkeeper Education Bundle

Bookkeeping Guidebook

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

As an example of an account reconciliation, a company controller wants to reconcile all balance sheet accounts at the end of the year, so that their ending balances can be justified to the auditors. This involves collecting documentary evidence concerning the amounts stated in each account. For example, she matches the total in the payables detail report to the ending balance in the trade payables account; this means that she can give a copy of the payables report to the auditors as proof that the ending balance in the trade payables account is correct.

As another example of account reconciliation, the controller maintains a list of the prepaid expenditures recorded in the prepaid expenses asset account, and adjusts this list at the end of each month for any additions to the account, as well as deductions for items in the account that have been charged to expense.