What is Account Reconciliation?

Then, for correct accounts reconciliation, the accountant has to compare the balance in the general ledger with the data from independent third-party systems or other supporting documentation . However, the account reconciliation process usually takes place at the end of the accounting period to ensure the general ledger account balance is complete and accurate. By using available information technology, organizations can more easily automate their reconciliation and for each financial close cycle less manual labour would be required. As late as 2012, 90% of companies still reconciled manually, using Microsoft Excel spreadsheets.

Companies can perform bank reconciliations as often as needed to ensure consistency between these documents. This saves your company from payingoverdraft fees, keeps transactions error-free, and helps catch improper spending and issues such as embezzlement before they get out of control. In most accounting departments, account reconciliations are done before the month-end financial close. Adjusting journal entries for any reconciling items that are discovered are posted to the GL in the current period.

reasons why account reconciliation is necessary

There are four primary reasons for doing account reconciliations, although there are many other benefits as well. Second, regular comparisons to outside information can uncover fraud and anomalies. Third, the balances on balance-sheet accounts — assets, liabilities and equity — persist from one fiscal year to the next, so detecting and correcting discrepancies is critical to avoid perpetuating errors. Fourth, external auditors require and review account reconciliations when assessing a public company’s internal controls environment and fraud risk under the Sarbanes-Oxley Act. Account reconciliation is an internal control process that compares a company’s GL balance with a second source to determine its validity and accuracy. Because account reconciliations are tedious and time-consuming, they are often done after the financial close, or they are delayed or even overlooked.

• Even with an online payment portal, you’ll still get payments coming in from outside of the platform via checks or electronic payments.
• Companies can perform the reconciliation process as often as they want, but most prefer to do it on a monthly basis following financial close.
• While the entries in the general ledger are based on the facts of the moment, they may not always be accurate.
• When conducting a reconciliation at the end of the month, the accountant noticed that the company was charged ten times for a transaction that was not in the cash book.

This is the amount that the company can report on its balance sheet if it agrees to the adjusted balance per the bank. I know you’d rather be selling your products or providing services to your clients than being stuck in the office doing account reconciliations. But the What is an account reconciliation good news is, if they’re done on a timely basis, they become much easier. The two outstanding checks will not have to be recorded as a journal entry, since the adjustment is on the bank’s side. However, any adjustments on the general ledger side will have to be entered.

Best Practices for Business Account Reconciliation

There are two main ways of going through the process of account reconciliation. Whichever is best for you will depend on your specific reconciliation needs.

Account reconciliations come in various forms and can be for personal or professional use. Determine whether corrective action is required for each reconciling item. Match each transaction in the general ledger to each transaction in the second source. https://simple-accounting.org/ Saving money by identifying hidden fees, such as storage fees, fuel surcharges, service charges and administration charges, and determining whether these fees are valid. If there are transactions that don’t look familiar to you, investigate.