What Is Account Reconciliation?
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Where the general ledger account balance is not consistent with or substantiated by information obtained from the supporting documents, the areas having these discrepancies should be noted. In the event that something doesn’t match, you should follow a couple of different steps. First, there are some obvious reasons why there might be discrepancies in your account. If you’ve written a check to a vendor and reduced your account balance in your internal systems accordingly, your bank might show a higher balance until the check hits your account. Similarly, if you were expecting an electronic payment in one month, but it didn’t actually clear until a day before or after bookkeeping the end of the month, this could cause a discrepancy.
For example, while performing an account reconciliation for a cash account, it may be noted that the general ledger balance is $249,000. Still, the supporting documentation (i.e., a bank statement) says the bank account has a balance of $249,900. For example, while performing an account reconciliation for a cash account, it may be noted that the general ledger balance nonprofit board president responsibilities is $500,000. Still, the supporting documentation (i.e., a bank statement) says the bank account has a balance of $520,000. For example, when performing bank reconciliation, a business compares its financial statements with the records received from the bank.
Most importantly, reconciling your bank statements helps you catch fraud before it’s too late. It’s important to keep in mind that consumers have more protections under federal law in terms of their bank accounts than businesses. So it is especially important for businesses to detect any fraudulent or suspicious activity early on—they cannot always count on the bank to cover fraud or errors in their account.
Should there be any discrepancies that come up through the reconciliation process, you can then take action to resolve them. As a result, the accounting industry has sought ways to automate a previously strenuous manual process. The pressure of SOX is coupled with the perennial need to mitigate erroneous reconciliation in the process. 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 enough.
Establish clear processes and procedures
An outcome of this examination is that adjusting entries are made to the accounting records, to bring them into line with the supporting evidence. This tends to result in fewer audit adjustments at the end of the year, since most issues have already been found and corrected by the accounting staff. Reconciliation is an accounting procedure that compares two sets of records to check that the figures are correct and in agreement and confirms that accounts in a general ledger are consistent and complete. In double-entry accounting, each transaction is posted as both a how to calculate net realizable value nrv debit and a credit.
How Account Reconciliation Works (Reconciliation Process)
Another possibility is that the difference is caused by the fraudulent manipulation of accounting records. Account reconciliation is a key accounting process for businesses of all sizes. Reconciling an account is an important skill that every accountant and business owner should possess.
How to perform a three-way trust reconciliation
The bank discovered that the mysterious transaction was a bank error, and therefore, reimbursed the company for the incorrect deductions. Rectifying the bank errors bring the bank statement balance and the cash book balance into an agreement. Some reconciliations are necessary to ensure that cash inflows and outflows concur between the income statement, balance sheet, and cash flow statement. Cash flow can be calculated through either a direct method or an indirect method. GAAP requires that if the direct method is used, the company must reconcile cash flows to the income statement and balance sheet.
- The type of industry tends to determine the specifics related to this reconciliation.
- Reconciliation in accounting is needed whenever there are financial transactions to ensure accuracy and consistency in the records.
- In contrast, a consulting firm may find that monthly reconciliations for invoices and expenses are enough.
- By performing reconciliations against the general ledger, the company can ensure that its financial records are accurate and up-to-date.
- For lawyers, account reconciliation is particularly important when it comes to trust accounts.
Compares Different Account Balances
Depending on the account type, you may also require additional details presenting the whole activities executed on the account. These activities include details of debit and credit transactions in the account. Overall, account reconciliation plays an important role in a company’s risk management framework relating to accounting. One other use of account reconciliation is a company’s need to maintain an internal control environment that complies with Section 404 of the Sarbanes-Oxley Act.
