What is Account Reconciliation: Process, Example and Types

Introduction

Account reconciliation is a critical financial process that ensures the accuracy and consistency of an organization’s financial records. By comparing internal financial statements with external sources, such as bank statements, businesses can identify discrepancies, correct errors, and maintain financial integrity. 

This blog delves into the essentials of account reconciliation, outlining the step-by-step process, and exploring the various types of reconciliation. Understanding this fundamental practice is vital for businesses aiming to achieve accurate financial reporting and make informed decisions.

What Is Account Reconciliation?

Account reconciliation is the process of cross-checking a company’s account balance with external data sources, such as bank statements. Its purpose is to ensure accuracy and consistency of financial data, which is vital for informed decision-making and maintaining financial integrity.

It is a general practice for businesses to create their balance sheet at the end of the financial year, as it denotes the state of finances for that period. However, you need to record financial transactions throughout the year in the general ledger to be able to put together the balance sheet. Account reconciliation is an important accounting process as the entries in the general ledger may not always be accurate. For instance, when you receive a check from a customer, you may have recorded it as paid. But there are chances that the check could have bounced due to numerous reasons. Or the payment you made to supplier A went into the accounts of supplier B due to a clerical error.Reconciliation enables us to identify such anomalies and ensure that these entries are adjusted prior to creating the financial statements. 

8 Common Examples of Account Reconciliations

A common example of account reconciliation is comparing the general ledger to sub-ledgers, such as accounts payable or accounts receivable. This ensures that all transactions are recorded accurately and any discrepancies are identified and corrected.

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.

• Cash balance in the ledger and bank account

  Often the cash balance in the book of accounts and the bank accounts may not match. This could be due to many reasons, such as missed entries, bounced payments, charges incurred, interest accrued, and much more. Reconciliation enables us to identify such disparities, identify the reason and take proactive actions such as adjusting journal entries to ensure accuracy. 

• Accounts payable reconciliation

  Accounts payable is the money a company owes to suppliers and vendors. The production and delivery of goods or services that the company deals with depend on smooth accounts payables. It is essential to reconcile the accounts payables balance to avoid short payments, disputes and enjoy benefits such as early payment discounts. This ensures smooth operations, supplier relations, good market reputation, and much more.

• Accounts receivable reconciliation

  Accounts receivable is the amount that your customers owe you for the goods sold or services provided. You will need to give special importance to reconciling accounts receivable to ensure steady cash flow and good customer relations.. Businesses need to reconcile and check the bank and ledger balances to ensure that there are no short payments, deductions, account receivable disputes, and to stop credit facilities for customers that default regularly.

• Prepaid expenses reconciliation

  Companies often pay some expenses or for some purchases in advance, especially when they are recurring in nature. However, prepaid expense accounts need to be reconciled to ensure that the goods or services were received or delivered as per the contract terms. Reconciliation also helps evaluate if the expense needs to be continued or not.

• Accrued liabilities reconciliation 

  Accrued liabilities are expenses that a company has incurred but has not yet paid or recorded in its financial statements. They represent obligations for goods or services received that will be paid in the future. These liabilities help provide a more accurate picture of a company’s financial position by recognizing expenses when they are incurred, rather than when they are paid. This allows for better matching of revenues and expenses within the same period, leading to more precise financial reporting and aiding in effective financial planning and decision-making.

• Inter-company transactions reconciliations

  In many organizations, there are subsidiaries, group companies, and so on. In such a situation, there can be inter-company deposits made, depending on the requirements of different companies. However, since each of the group companies has its own legal entity, the books of accounts also need to be maintained separately. To ensure that all cash balances, liabilities, and assets are updated, periodic account reconciliation is required.

• Assets (sold & bought) reconciliation 

  Most companies have numerous assets, including immovable property, machinery, inventory,, and more. Over time, these assets can be sold or written off according to their stage in the lifecycle or due to depreciation. Accounts reconciliation helps take stock of the assets that a company has and enables the balance sheet to reflect the true value of the asset

• Investments reconciliation

  Companies often invest in some projects for better returns, taxation purposes and many other reasons. Periodic accounts reconciliation will ensure that the true value of these investments is reflected in the book of accounts.

Types of Account Reconciliations

Account reconciliation comes in various forms, each tailored to address specific financial aspects and discrepancies within an organization. Understanding the different types is crucial for maintaining financial accuracy and transparency. 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. 

Here are some of the most common types of account reconciliations:

1. Bank account reconciliation

   This involves comparing a company’s bank statements with its accounting records to ensure that all transactions are accurately recorded.

2. Inventory reconciliation

   This involves reconciling the physical inventory count with the accounting records to ensure that all inventory is accounted for and correctly valued.

3. Payroll reconciliation

   This involves reconciling payroll records with bank statements and tax filings to ensure that all payroll transactions are accurately recorded and all taxes are correctly withheld and paid.

4. Credit card reconciliation

   This involves comparing a company’s credit card statements with its accounting records to ensure that all transactions are accurately recorded and any discrepancies are identified and resolved.

5. Fixed asset reconciliation

   This involves reconciling the physical assets owned by a company with the accounting records to ensure that all assets are accounted for and correctly valued.

6. Expense reconciliation

   This involves reconciling expense reports and receipts with accounting records to ensure that all expenses are accurately recorded and any discrepancies are identified and resolved.

What is the Account Reconciliation Process?

To ensure accuracy and balance, the process of account reconciliation involves comparing the balances of general ledger accounts with the supporting sets of data sources, such as bank statements, invoices, and receipts. 

Here is a step-by-step process for performing account reconciliation:

1. Collect all relevant financial records

   Gather all financial records, including bank statements, invoices, receipts, and any other documentation related to the accounts you need to reconcile.

2. Identify discrepancies

   Compare the financial records with the entries in the accounting system. Look for discrepancies, such as missing or duplicated entries, incorrect amounts, or other errors.

3. Investigate discrepancies

   Once the discrepancies are identified, investigate them to determine the root cause of the anomaly. This may involve contacting vendors or customers, reviewing contracts, or checking for errors in the accounting system.

4. Make adjustments

   After identifying and investigating discrepancies, make any necessary adjustments to correct errors and reconcile the accounts. This may involve updating the accounting system, adjusting entries, or reconciling payments.

5. Document changes

   Whenever adjustments are made to financial records, be sure to document the changes. This helps ensure financial records are accurate and helps you track changes over time. This is also required during audits. 

6. Verify accuracy

   After making adjustments, double-check financial records to ensure that they are accurate and match external sources, such as bank statements or vendor invoices.

7. Repeat the process regularly

   Account reconciliation is an ongoing process, so it’s important to repeat these steps regularly to ensure the accuracy and integrity of your financial records. The frequency of reconciliation may vary depending on the size and complexity of business, but it’s generally recommended to reconcile accounts at least once a month.

Common Challenges in Account Reconciliations and How to Solve Them

While the discrepancies that need to be addressed through accounts reconciliation are vast, we list here some of the most common ones:

• Ledger and bank balances don’t match

  Here’s how such situations can be corrected:

  • Check for time differences or bank holidays causing delays in the amount showing up in the account.
  • Look for check-based errors like the number in figures and words not matching, wrong date, or signature errors.
  • Find out if the customer has raised a dispute but the finance department is not aware because the sales department has not updated them yet.
  • Consider automation of the receivables process to ensure that all the parties concerned have access to updated information.

• Physical inventory does not match inventory records

  Here’s how such situations can be corrected:

  • Make sure that the store management team does an entry every time they dispatch goods to customers.
  • Carry out periodical inventory checks physically to ensure that all the damaged and defective goods are accounted for and records updated about any exchanges or replacements.
  • Invest in a centralized system that ensures that inventory records are updated in real-time.

• Actual customer credit balance is less than accounted for

  Here’s how such situations can be corrected:

  • Check with the sales team if they have received further orders from the same customer, which has not been updated in the system.
  • Ensure that a credit onboarding of customers (even existing ones) is a part of the process before agreeing on sales with delayed payments.
  • Have an automated credit application in place to ensure that the credit terms are agreed upon based on the latest credit and other information.

• The amount paid by the customer is not completely reflecting in the bank

  Here’s how such situations can be corrected:

  • Check if the customer issued a stop payment because they were not happy with the quality or other aspects of the goods or services they received.
  • Delve deeper to find out if there were some charges that were imposed by the bank that you failed to account for in your entries.

• Wrong amount was recorded in the ledgers

  Here’s how such situations can be corrected:

  • Look for early payment rebates that were agreed upon by both parties, which you did not consider while recording the amount.
  • Check for fees or penalties that you did not think about while making the entry.

How HighRadius Can Help With Account Reconciliation?

HighRadius’ comprehensive AI-powered Record to Report suite allows you to streamline and improve your business’s account reconciliationprocesses. By leveraging our Account Reconciliation Software, you can utilize out-of-the-box AI transaction matching rules to automate the reconciliation process and achieve almost 95% journal posting automation.

With real-time reconciliation capabilities, HighRadius ensures that your financial records are updated daily. This is particularly helpful to organizations where a large number of transactions take place every day. Its powerful matching algorithms quickly identify and resolve variances, increasing speed and accuracy.

It offers configurable matching rules and algorithms to identify and resolve variances in general ledger accounts and makes the financial data compliance and audit-ready.

• Transaction Matching: With HighRadius’ Transaction Matching feature, you can automate GL data extraction from ERPs and achieve a 90% match rate.You can automate your reconciliation process with accurate AI/ML-powered matching across data sources. 
• Reconciliation Control Tower: With this feature, you can achieve 80% reconciliation automation. HighRadius gives you a list of active GL accounts for reconciliation, with variances and certification status per task.
• Journal Entry Automation: HighRadius’s pre-built journal entry templates help you automate 95% of journal entry tasks. You can automate your journal entry preparation for identified open items and clearing using customizable LiveCube apps and automate posting to the ERP of your choice.
• Reconciliation Progress Dashboard: You can improve productivity by 50% when it comes to account reconciliation with HighRadius’ Reconciliation Progress Dashboard. The feature helps you take proactive actions on potential delays to reduce days to reconcile.
• Substantiation Reconciliation: Substantiation reconciliation allows for automated comparison of GL and supporting balance for open item management and analytics. This also allows you to automate journal entry posting with HighRadius; LiveCube platform.
• Maker Checker Workflow:HighRadius’ Maker Checker Workflow allows you to streamline and gain control of the reconciliation processes by actively tracking and monitoring tasks for audits with a customizable workflow.

FAQs

1) What accounts need to be reconciled?

Accountants typically perform an account reconciliation for all their asset, liability, and equity accounts. 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.

2) What makes a good account reconciliation?

Accuracy and completeness are the two most important things when reconciling accounts, and these are what accounts for effective and proper account reconciliation. Additionally, reconciling accounts on time consistently is also essential to maintaining financial integrity.

3) What is the main purpose of an account reconciliation?

The main purpose of carrying out account reconciliation, for most organizations, is to ensure the maintenance, accuracy and consistency of financial records by comparing internal records with external statements, identifying discrepancies, and making necessary adjustments to prevent errors and fraud.

4) Who should prepare the account reconciliation?

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.

5) How often should account reconciliations be performed?

Account reconciliations should be performed regularly, ideally monthly, to ensure financial records are accurate and up-to-date. High-volume accounts may require more frequent reconciliations. Such regular and timely reconciliations support financial integrity and informed decision-making.