The Basics of Reconciliation

General Bookkeeping

July 13, 2021

What is Account Reconciliation?

Account reconciliation is the process through which internal financial records are compared against monthly statements from external sources such as financial institutions to ensure that they match. This process helps to detect errors, discrepancies, and fraud. In short, through reconciliation, an accountant can explain the differences between two financial records and be certain that there are no errors and that the recorded amounts leaving one account match the amounts incurred in the other account. Most small business owners don’t reconcile their accounts, and many bookkeepers also don’t know how to do this properly even though it’s an essential function in proper bookkeeping.

What Are the Primary Ways to Reconcile an Account?

The most common account reconciliation method to be used is documentation review. This method involves reviewing the appropriateness of each transaction in the statements of the account detail. The goal of this method is to ensure that the amount written in the account corresponds to the actual amount that was spent by the company.

The second common method for reconciliation is through analytics review. This method reconciles the accounts by using estimates of historical account activity levels. In other words, it approximates the actual amount that should be in the account based on previous account activity levels. Through this process, you can see if the discrepancies that occur are present due to a balance sheet error or if there is theft happening.

How Does the Reconciliation Process Work?

With all of this in mind, one might start to wonder where to start and how this process goes. Though most of the time an accounting software is used to record transactions and to reconcile the differences that come about, sometimes humans will still need to intervene. Below the process is broken down for you into five simple steps:

Compare the cash book statement with the bank statement.

In this step, it is important for you to keep track of all of the transactions which are recorded in the cash book and to make a note of the similar transactions that appear in the bank statement. In addition to this, make a list of all transactions which are in the bank statement that are not supported (this means that there is no evidence of this transaction happening, such as a payment receipt).

Take note of the payments which are recorded in the cash book that are not seen as payments in the bank account statement.

Such transactions may include checks and ATM transactions. When you find transactions such as those, you will need to deduct them from the bank statement balance. It is also necessary to take note of the transactions that are in the bank statement but are not in the cash book, such as check printing fees, overdrafts, uncleared checks, ATM service charges, and so forth.

Look over the cash book and the bank statement for transactions that should be present in both records.

In this step, it is key to make sure that the transactions that need to be present in both the cash book and the bank statement appear in each record. Here you will look over the cash book and find account credits and direct deposits that are present there but not in the bank statement, and add them to the bank statement balance. Likewise, if there are deposits that are present in the bank statement but not in the cash book, you will need to add entries for those items in the cash book balance.

Analyze the bank statement to check for errors.

Things to check for in this step are things such as an incorrect debit or credit on the bank statement of a check or deposit recorded in the wrong account. Though bank errors are not a frequent occurrence, it is important for the company to contact the bank and report such errors as soon as you find them. Even though this correction will be shown on a future bank statement, it is important to keep in mind that an adjustment is still necessary for the current period’s bank reconciliation to accommodate for the discrepancy.

Verify that the balances are equal.

When everything is done correctly and verified, the balances of the bank statement and the cash book should be equal. It will be necessary to make a bank reconciliation statement in which you will explain the differences between the company’s internal records and the bank account.

All in all, reconciliation is important because it helps to avoid overdrafts on cash accounts, catches fraudulent or overcharged credit card transactions, explains timing differences, and also helps to find theft or other mistakes. By reconciling your accounts and comparing the transactions you will be able to produce accurate and reliable financial statements that are high in quality.