Introduction
Errors in your accounts rarely stay small. If they aren’t caught early, they start to pile up, slowly distorting your financial picture and creating bigger problems during audits, tax filings, or investor reviews.
Your best bet to avoid such scenarios? Performing account reconciliations regularly. A process that consistently matches what different financial records say and makes sure everything stays accurate.
What is account reconciliation?
Account reconciliation is where you compare the records of your general ledgers to those recorded in supporting documents like bank statements, Accounts Receivable (AR) and Accounts Payable (AP) sub-ledgers, or any other sources containing transaction details.
Since the records are of the same financial activity, they are supposed to match completely.
But if they don’t, the process further involves identifying the differences, analyzing the reasons behind those differences, performing corrections, and eventually making sure that all records match and are accurate.
Why is account reconciliation important?
In accounting, even small inconsistencies can result in major financial errors over time. With multiple transactions happening daily across bank accounts, invoices, and internal ledgers, it becomes easy for errors to slip through unnoticed. Here is why reconciliation matters:
- Keeps your financial records accurate, thus helping compliance and audits
- Helps you catch duplicate entries, missed transactions, or incorrect amounts
- Spots unauthorized or suspicious transactions
- Supports informed decisions, as reconciled accounts give you the real picture of your business's financial health
- Maintains trust with your stakeholders, like investors, lenders, and partners, who rely on the stability of your financial statements
What are the objectives of account reconciliation?
The key purpose of account reconciliation is financial accuracy, which ultimately leads to simplified compliance. Let’s take a look at some of its objectives.
- Identification of discrepancies: Account reconciliation lets you compare records side by side and spot any differences between the general ledger and supporting documents.
- Corrections: Once differences are found, reconciliation helps you dig deeper and understand why they happened and take corrective measures.
- Accuracy in financial reports: Since financial statements are prepared using general ledger data, reconciliation ensures the numbers are accurate, making financial reports more reliable.
- Enforcement of compliance: Once your records are complete, accurate, and traceable, they automatically become ready for audits and compliance.
Types of account reconciliation
Reconciliation primarily depends on the types of records that are being matched. Based on that, it can be categorized into the following:
- Bank reconciliation: As the name suggests, in bank reconciliation, your internal records or cash books are matched and aligned with your company’s bank statements.
- Vendor reconciliation: In vendor reconciliation, the statements provided by the vendors that you work with are matched against your own internal Accounts Payable (AP) record, which shows the money a business owes to its suppliers or vendors.
- Customer reconciliation: It’s a way to confirm that your cash books and the customer’s records – like invoices and payments – show the same balance. From your end, it’s the transaction details recorded in your AR ledger, which tracks what each customer owes you.
- Intercompany reconciliation: Intercompany account reconciliation works for companies with many branches and subsidiaries. It basically matches the transaction data recorded between two entities of the same corporate group.
- Payroll reconciliation: This reconciliation is done to compare the data in the payroll register, which covers what salaries employees are paid, to those recorded in other documents supporting the transactions.
Steps involved in account reconciliation
The reconciliation process can be understood clearly with the help of this step-by-step workflow:
1. Assess your records
You begin by checking whether the opening balance of the account matches the closing balance from the previous period. If these two amounts don’t match, it signals that something may have been missed or recorded incorrectly earlier.
2. Collect the required information
Collect all the documents you need to reconcile. Account ledgers, bank reconciliation statements, and other third-party data. In addition, clearly identify which account(s) need to be reconciled and the time period (monthly, quarterly, or yearly).
3. Review and compare the records
Once the data is collected, begin reviewing it in detail. So, it involves matching general ledger balance against supporting records, such as bank statements, credit card statements, and other third-party reports.
4. Identify and investigate differences
Investigate any differences found between the two sets of records, and make necessary corrections. Discrepancies can be missed transactions, duplicated records, or data entry errors.
5. Document it all
Records every step of the process. What records didn’t match, what was the reason, and how it was corrected so when it’s time for audits, your team is not scrambling for evidence.
Common causes of reconciliation differences
The most common reasons for finding differences during reconciliation include:
- Timing differences when transactions may be recorded in one system earlier than the other.
- Missing entries, which happens when a transaction may be recorded in the bank statement but not entered in your company’s ledger.
- Duplicate entries due to the same transaction being recorded more than once by mistake.
- Data entry errors that occur when incorrect amounts, wrong dates, or posting to the wrong account happens.
Bank charges or fees that your bank deducts but that may not be recorded in your books.
Account reconciliation example
Let’s consider this account reconciliation example to understand how it plays out in real-world scenarios.
A company named ABC Traders maintains a general ledger that records all its financial transactions. At the end of January, the accountant decides to reconcile the bank account to ensure the GL records match the bank statement. This is how the process will flow:
Step 1: Compare the records
| Account Type | Amount |
|---|---|
| Balance as per General ledger | $10,500 |
| Balance as per Bank Statement | $9,800 |
| Difference | $700 |
Since the records don't match, it’s time to identify why.
Step 2: Tease out the differences
On closer inspection, this is found:
- A payment of $500 made to a supplier on January 29th has been recorded in the GL but hasn't cleared the bank yet (outstanding check).
- A bank charge of $200 was deducted by the bank in January, but was never recorded in the GL.
Step 3: Analyze and correct the differences
- The $500 difference is a timing difference. The payment was made, but hasn't reflected in the bank statement yet. No correction needed in the GL, just a reconciling item.
- The $200 difference is a recording error. The bank charge was missed in the GL and needs to be posted. It’s added in the GL.
After adjusting for the bank charge and accounting for the outstanding check, the adjusted general ledger balance and the adjusted bank balance both reconcile to $10,300.
What are some account reconciliation best practices?
Follow these best practices to ensure your account reconciliation process has no loopholes:
1. Automate
Switch to automation as much as you can instead of doing everything manually. Using AI and reconciliation tools saves precious time and lowers errors.
2. Standardize the process
A consistent method for reconciliation makes everything much smoother and reliable. Standard steps and formats cut down errors and make it easier to compare financial data over time.
3. Identify and track key metrics
Set a few metrics to measure how well your reconciliation process is working. It can be accuracy, turnaround time, and number of errors to spot weaknesses and improve performance.
4. Reconcile in sections
Instead of reconciling everything at once, break the process into smaller steps. Handling tasks like data collection, comparison, and discrepancy review separately makes the work easier. Plus, it reduces the chance of missing something.
5. Follow accounting standards
Always make sure reconciliations follow accepted accounting principles to keep reporting consistent and trustworthy.
Manual vs automated account reconciliation
Automated reconciliation uses tools and software solutions to perform the entire reconciliation process. Here is how the two differ:
| Factors | Manual Reconciliation | Automated Reconciliation |
|---|---|---|
| Process | Done by hand using spreadsheets or paper-based records | Performed by software that matches and compares records automatically |
| Speed | Slow, especially with large volumes of transactions | Fast. Processes high volumes in a fraction of the time |
| Accuracy | Prone to human errors like miscalculations or missed entries | Higher accuracy with reduced risk of human error |
| Scalability | Difficult to scale as transaction volumes grow | Easily handles growing volumes without additional effort |
| Visibility | Limited. Hard to get a real-time view of reconciliation status | Real-time dashboards and reporting provide full visibility |
| Audit trail | Inconsistent, depends on how well records are maintained manually | Automatically generates a clear, consistent audit trail |
| Frequency | Typically done at period end due to time constraints | Can be done continuously or in real time |
| Compliance | Risk of inconsistency in following accounting rules | Standardized rules built into the system ensure consistent compliance |
Tools and software used for account reconciliation
Most businesses rely on a mix of different tools depending on their size and transaction volume.
1. Spreadsheet tools
Spreadsheets are useful for organizing and comparing transactions. But they can be frustratingly time-taking and are more likely to have errors, especially when transaction volumes increase.
2. Accounting tools
Accounting software solutions like QuickBooks, Xero, or Sage are popular for automating basic accounting tasks and offer built-in reconciliation features.
3. ERP systems
Large organizations often use ERP systems like SAP and Oracle. They bring all financial data into one centralized platform and can handle complex reconciliations.
4. Reconciliation software
Certain tools for account reconciliation, like BlackLine and Trintech, are built specifically for reconciliation. And are ideal for companies with high transaction volumes.
Role of account reconciliation in audits
Audits are important for any organization. But to keep your audits efficient and avoid audit findings that can negatively impact your business, account reconciliation matters a lot.
Regularly reconciled accounts make audits smoother. There’s no need to spend extra time pondering over unclear transactions at the last minute because the records are already clean and verified.
Plus, the clear documentation and audit trails can be used by auditors to understand how transactions were recorded and if adjustments were made correctly.
The bottom line
Account reconciliation builds financial accuracy, integrity, and trust in your business.
But the thing is that reconciliation is only as smooth as the payment processes feeding into it. For businesses dealing with cross-border payments, the complexity multiplies.
Multiple currencies, slow settlements, FX costs, compliance requirements, and scattered payment records make reconciliation quite challenging.
That’s exactly what Xflow is for. Designed to make international payment collection seamless for businesses, it offers faster settlements, transparent pricing, zero FX markup, flexibility of holding multi-currency accounts, automated FX management, and free eFIRA.
What’s more, rolled with all these features are business-ready solutions like automated reconciliation, ERP and accounting integrations, and invoicing, so all your workflows are integrated and simplified.
Want to experience how Xflow simplifies how you receive payments, reconcile, and stay compliant? Sign up for a demo now!
Frequently asked questions
Account reconciliation is where you match two sets of records giving the same financial information. In this case, it’s your company’s general ledger and bank statement. The goal is to make your financial statements accurate and help you with compliance and audits.
Account reconciliation is simply a way to keep your financial statements clean and accurate. The direct benefit of this is easy compliance and traceable records during audits. Plus, it builds trust in your investors and lenders.
Account reconciliation can have many types. They are divided based on the type of records being reconciled. Some of the common ones are vendor, intercompany, bank, credit card, payroll, and customer reconciliation.
For organizations managing large volumes of transactions, it’s better to reconcile on a daily basis. Generally, monthly reconciliation is considered good for your organization.
In bank reconciliation, you are matching internal ledgers with bank statements specifically. But in the case of account reconciliation, general ledgers can be matched by any documents supporting a particular transaction.
Your financial statements will be inaccurate or incomplete, which will create problems during audits and compliance.
Yes, of course, you can automate the entire reconciliation process. You can either use dedicated reconciliation software or accounting platforms that offer built-in automation features.
