What is Account Reconciliation?
Includes FREE account reconciliation templates
Account Reconciliation is verifying and adjusting the balances of two financial statements to ensure they agree. It is used to identify and correct any discrepancies between financial records.
What is the Purpose of Account Reconciliation?
Manual reconciliation in accounting is verifying and adjusting the balances of two sets of financial statements to ensure that they agree. Its purpose is to identify and correct any discrepancies between them.
It can be helpful for small business owners, as it can help them ensure that their finances are in order and that they are aware of any discrepancies.
As a bookkeeper, I have completed account reconciliations for large departments and small businesses. Sometimes, the hardest reconciliations are when there is a discrepancy of a few pence; although this may not seem much, it can be a few incorrect transactions. It is, therefore, essential to ensure you complete reconciliations.
How Often Should I Complete Account Reconciliations?
Account reconciliation is essential for accurate financial data and should be completed regularly. Depending on the size and complexity of the business, it is recommended to complete account reconciliations at least once every month. However, with larger businesses, breaking up the process into more frequent intervals, such as weekly or bi-weekly reconciliations, may be beneficial.
Year-end reconciliations are essential for ensuring all accounts are properly closed out and prepared for the next financial year. If you complete your bookkeeping, you will complete this yourself or pass the accounting records to a bookkeeper or accountant.
Double Entry Accounting
In double entry accounting, each transaction is recorded in at least two accounts and will be equal. If a transaction is incorrect or missing, there will be an error in both the debits and credits. It may affect both the balance sheet and profit and loss.
Why is Balance Sheet Reconciliation Important in Accounting?
If you’re a small business owner, reconciling your balance sheet is vital to keeping accurate records and ensuring that your books are balanced. You can spot discrepancies and correct them by matching your financial reports (e.g. bank statements, supplier statements) with your internal bookkeeping.
Using accounting software like QuickBooks will automatically import transactions from the bank, eliminating the need for manual data entry. This not only saves time but also reduces the risk of human error. Below is an example of a bank reconciliation in QuickBooks; it shows a difference of £14,387.05, with 12 transactions to reconcile.
It also helps you track where your money is going and detect fraudulent activity. Reconciling regularly can save you a lot of headaches (and money) down the road!
Reconciliation accounting can be complex and time-consuming, but maintaining accurate financial records is worth the effort.
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What are the Differences in Account Reconciliation?
There might be several reasons for the differences when completing an account reconciliation. Some of the most common differences include the following:
Unrecorded transactions – This includes any purchases, deposits or payments not recorded in the accounting system.
Timing difference – This happens when there is a difference between when the transaction was completed and when it is recorded in the accounting system.
Mathematical mistakes – If calculations are incorrect, this will cause account differences.
Uncleared items – This occurs when a transaction has been initiated but not cleared by the bank or other financial institution yet.
Duplicate Transactions – If a transaction is recorded more than once into the accounting system, this will create differences in accounts.
What Are The Benefits of Account Reconciliation?
Account reconciliation provides several benefits to businesses of all sizes. Some of the most common advantages include the following:
• Improved Accuracy – With account reconciliations, businesses can be sure that their records are accurate and up-to-date with all the transactions included, which can help reduce mistakes and improve decision-making.
• Reduced Fraud – Account reconciliation provides an extra layer of protection against potential fraud or other financial mismanagement within the business.
Financial Statements
Every business requires financial statements to calculate its business profits and to track its financial performance. Financial statements include income statements, balance sheets, and cash flow statements, which help you track the company’s financial health.
By keeping accurate records of these statements, businesses can understand their financial performance and make decisions accordingly. Account reconciliations ensure that all data entered into these statements are accurate and up-to-date.
General Ledger Accounts
The General Ledger (GL) is an important part of the accounting process. It records all financial transactions within a business and contains detailed accounts for all income, expenses, assets and liabilities.
Account reconciliations ensure that all accounts within the GL are accurate and up-to-date.
What are the different types of Reconciliation?
The size of your business will depend on the number of reconciliations you must complete. A small business may have a simple income and expenses ledger and bank account; they will only need a bank reconciliation to the bank statement.
A more complex business with credit, loans and stock will need to complete more reconciliations, and these may include the following:
Balance Sheet Reconciliation
It is essential to reconcile balance sheet accounts regularly to ensure accurate and up-to-date figures. This process involves comparing the balance sheet accounts in the accounting system with the account statements.
If there are any discrepancies, they need to be investigated and corrected. This can be a complex and time-consuming task, but it is essential to maintain accurate financial data.
Bank Reconciliation
A bank account is one of the most essential balance sheet reconciliations to complete. You will need to check the bank statement balance with the balance on the balance sheet on a specific date. Using a bank reconciliation statement will help find any differences.
See our link further down for a free bank reconciliation template.
Accounts Payable Reconciliation
Another common reconciliation is between the accounts payable and the supplier statement. This is to check all invoices are entered into the system and that the amount owed matches the supplier statement.
Accounts Receivable Reconciliation
The accounts receivable reconciliation is between the customer ledger and the customer account statements. If you are using an accounts system, this is typically an automatic process. There are times that the balances might be incorrect, especially if a journal is entered incorrectly for an adjustment.
Credit Card Reconciliation
You must complete a reconciliation for each credit card you have for the business. It is so that you can check that the transactions on the credit card statement match the transactions in the accounting system. There is a card called Pleo that helps with expense management.
Cash Account Reconciliation
You must check the cash amount with the value of sales made minus expenses. If there are any discrepancies, you will need to investigate and correct them.
Intercompany Reconciliations
Intercompany account reconciliations are essential for companies that have multiple entities or branches. By reconciling the accounts between various departments, subsidiaries, and franchises, businesses can ensure that all transactions are accurate and up-to-date.
An intercompany reconciliation consolidates the general ledgers of all the departments into one general ledger. It also provides a better understanding of the company’s financial position, allowing more informed decisions about its future development and growth.
Taxes Payable
If you are VAT registered or run a payroll, you will have accounts for taxes due. Ensure these match the amount you owe.
Accrual Account Reconciliation
Accruals are used to ensure transactions are posted to the correct accounting period. Accruals include work in progress, goods received but no supplier invoice and wages not processed.
By reconciling these accruals, businesses will ensure that the financial accounts are accurate and up-to-date.
Prepayments Account Reconciliation
Prepaid expenses are payments made for services or goods that will be received in a future accounting period. An example is for business insurance; if you paid for a year in advance, you would record it in the accounting period it relates to.
By reconciling the prepayments, you will ensure that the transaction is posted to the correct period.
Balance Sheet Reconciliation Process
Below are the eight steps in the balance sheet reconciliation process.
- Produce the report required of either the balance sheet or account transaction list at the accounting period you need to reconcile
- Enter the closing balance of the account.
- Compare the account balances to the closing balance of the bank statement, supplier statement or other documentation you have
- If there is a difference, check the line items one by one
- Make a list of any differences
- Adjust the accounts
- Check the account balances again
- If the Balances match, the process is complete
Tips for Ensuring Accurate Balance Sheet Accounts Reconciliation
When producing annual accounts, it is vital to reconcile accounts regularly, at least at year-end. Before you start, ensure you have all the relevant documentation to hand in for the reconciliation process; you will need credit card statements, bank statements or supplier statements.
Compare the closing balances between the accounting software and the source documents. If there are any discrepancies, investigate and correct them; this may involve journal entries or adding transactions.
If you need to add transactions, ensure you have the cash receipts, debit card receipts or supplier statements. If you are using a good accounting software package, it can be stored within the software.
Accounting Software for Account Reconciliation
We recommend using a good accounting software package to keep accurate business accounting records. This will automate much of the accounting process for you.
Good accounting packages can reduce errors and save time completing account reconciliations. Here is how it can help with the following tasks:
- Import a bank statement or a bank feed, reducing the risk of error
- Send automatic reminders to customers for outstanding payments
- Send recurring invoices
- Send invoices and receipts directly to the software
- Reconcile transactions easier
We suggest reviewing QuickBooks, Xero, Sage or FreshBooks UK To find the best accounting software for your business. They all offer free trials and discounts for new accounts.
Adding Auto Entry or Dext to import invoices or cash receipts and code them will also reduce the risk of errors and save time.
What is a Reconciled Transaction?
A reconciled transaction is an accounting transaction verified and matched to the bank statement. Once the transaction is matched, it will show as reconciled in the accounting records.
How to Adjust an Account Reconciliation
Once you have found the errors in the reconciliation, you need to make the adjustments to ensure that they balance. Several adjustments might involve adding missing transactions like supplier invoices, cash receipts, or an adjusting journal entry.
Adjusting journal entry is the hardest, as you must ensure that the debits and credits are correct. The easiest way to ensure it is correct is by looking at the trial balance or account transaction statement.
Account Reconciliation Template
To help with the reconciliation process, we have created two free templates. The first is for any account within the general ledger, and the second is for bank reconciliation.
Balance Sheet Reconciliation Template
The first template is for any general ledger account, including accounts receivable, accounts payable and VAT.
Instructions for Account Reconciliation Spreadsheet Template
Download the balance sheet reconciliation template using the link below and open it up.
Enter the date of the reconciliation and the ledger account.
Enter the general ledger balance in the accounts and the balance you wish to reconcile.
List any adjustments; once the totals turn green, the account is balanced, and all your transactions are complete.
Enter any adjustments into the accounting system.
Bank Reconciliation Statement
To help with bank statement reconciliation, we also created a free Excel template for download for bank statements and cash accounts. The template is also suitable for personal finance.
It is worth completing a monthly bank reconciliation to keep track of the financial position.
Conclusion to Balance Sheet Reconciliation
A Company’s balance sheet reconciliation is an important process for any business; it checks account balances in the records and other sources. It ensures that the financial account balances are accurate and up-to-date.
There are many accounts from the general ledger to reconcile, including bank and cash, accruals, accounts receivable, accounts payable, prepayments and stock levels; however, using accounting software can be a great time saver.
Accounting software allows you to import transactions quickly into your books and provides detailed reports to help inform key decisions in running a successful business. With regular account reconciliations, businesses will have greater control over their finances and ensure they stay on top of payments owed or due.
