Accounting Reconciliation: What It Is, How to Do It, and Best Practices

After finding evidence for all differences between the bank statement and the cash book, the balances in both records should be equal. You should prepare a bank reconciliation statement that explains the difference between the company’s internal records and the bank account. In accounting, reconciliation refers to the process of comparing two sets of records or financial information, such as bank statements, general ledger accounts, or other relevant records, to ensure their accuracy and consistency. To capitalized cost 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. Check that all incoming funds have been reflected in both your internal records and your bank account. Find any deposits and account credits that haven’t yet been recorded by the bank and add these to the statement balance.

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 the end of the month, this could cause a discrepancy. For example, real estate investment company ABC purchases approximately five buildings per fiscal year based on previous activity levels. This year, the estimated amount of the expected account balance is off by a significant amount.

Its purpose is to ensure accuracy and consistency of financial data, which is vital for informed decision-making and maintaining financial integrity. Reconciling accounts and comparing transactions also helps your accountant produce reliable, accurate, and high-quality financial statements. Most importantly, reconciling your bank statements helps you catch fraud before it’s too late.

Record to Report

Once any differences have been identified and rectified, both internal and external records should be equal in order to demonstrate good financial health. The first step is to compare transactions in the internal register and the bank account to see if the payment and deposit transactions match in both records. For example, the internal record of cash receipts and disbursements can be compared to the bank statement to see if the records agree with each other. The process of reconciliation confirms that the amount leaving the account is spent properly and that the two are balanced at the end of the accounting period.

1. A bank error is an incorrect debit or credit on the bank statement of a check or deposit recorded in the wrong account.
2. Stripe’s reconciliation process involves comparing your business’s internal records, such as invoices, with external records like settlement files, payout files, and bank statements.
3. Cash accounting is the easiest way to manage your accounting, and provides a better picture of your cash flow, but is only a suitable method for very small businesses.
4. Larger businesses with several branches may also need to complete intercompany reconciliations.
5. Find direct deposits and account credits that appear in the cash book but not in the bank statement, and add them to the bank statement balance.

Cash and Accrual Accounting

Stripe offers a powerful reconciliation solution that streamlines the process for businesses. Stripe’s reconciliation solution automates the reconciliation process for businesses and offers a comprehensive picture of your money movement. Reconciliation serves an important purpose for businesses and individuals in preventing accounting errors and reducing the possibility of fraud. Accounting software automation and adding a procure-to-pay software, like PLANERGY, can streamline the process and increase functionality by automatically accessing the appropriate financial records.

And while most financial institutions do not hold you responsible for fraudulent activity on your account, you may never know about that fraudulent activity if you don’t reconcile those accounts. If your AR balance is $60,000, but you only have $40,000 in invoices that are due, your net profit will be overstated and you’ll be paying taxes on income that you’ll never receive. Keeping your accounts reconciled is the best way to make sure that your balances are accurate and an important part of ensuring adequate financial controls are in place.

By business model

This document summarizes banking and business activity, reconciling an entity’s bank account with its financial records. Bank reconciliation statements confirm that payments have been processed and cash collections have been deposited into a bank account. 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.

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. Analytics review uses previous account activity levels or historical activity to estimate the amount that should be recorded in the account. It looks at the cash account or bank statement to identify any irregularity, balance sheet errors, or fraudulent activity. Reconciliation in accounting is not only important for businesses, but may also be convenient for households and individuals.

For example, a company can estimate the amount of expected bad debts in the receivable account to see if it is close to the balance in the allowance for doubtful accounts. The expected bad debts are estimated based on the historical activity levels of the bad debts allowance. Businesses are generally advised to reconcile their accounts at least monthly, but they can do so as often as they wish. Businesses that follow a risk-based approach to reconciliation will reconcile certain accounts more frequently than others, based on their greater likelihood of error. Sure, there are a number of professionals that can provide expertise in this task, the most obvious being an accountant. If you decide to hire someone to help, make sure they are following GAAP, or have credentials and experience that you trust.