Every quarter, you prepare financial statements for your business. You gather information on sales, inventory, and operating costs. You also examine your bookkeeping records to make sure they square with your business bank account statements, a process called account reconciliation.

Learn more about account reconciliation, how to do it, and why it’s critical for ensuring accurate financial record keeping.

What is account reconciliation?

Account reconciliation is the process of comparing two sets of accounting records to make sure the figures match. The comparison is made between internal records, typically a business’s general ledger of all transactions in a period, and external records such as bank and credit card statements, supplier invoices, and customer payment records. If they don’t match, you need to investigate and reconcile the differences and correct any errors in your financial statements.

The account reconciliation process is centered around five key accounts in a business ledger: assets, liabilities, and equity on the balance sheet; and revenue and expenses on the income statement.

Most businesses perform account reconciliation monthly, quarterly, and annually. Monthly account reconciliation is usually necessary for the five main ledger accounts because of the steady volume of transactions reflecting revenue, expenses, assets, liabilities, and equity. 

Reconciling accounts for fixed assets such as property and equipment may be done quarterly or annually, since these assets turn over infrequently. Recording depreciation is the main focus of fixed-asset account reconciliation.

Why is account reconciliation important

• Maintaining accurate financial records
• Preparing financial statements
• Ensuring regulatory compliance
• Promoting fraud detection

Reconciliation in accounting is typically needed for the following reasons:

Maintaining accurate financial records

The account reconciliation process ensures that every financial transaction is properly entered and that financial statements present a true picture of a business’s profitability. Account reconciliation can reveal missing transactions or those that were duplicated by accident. Reconciling accounts can also bring to light data entry mistakes, such as transposed numbers or incorrect calculations, which can easily occur if a business relies on manual financial recordkeeping.

Preparing financial statements

Before balance sheets and income statements can be completed, all underlying financial records must be verified through reconciliation of the asset, liability, and equity accounts—the key elements of the balance sheet—on the business’s general ledger. This then helps track revenue and expenses for the income statement. Reconciliation also squares profit with actual cash movement for a business’s third key statement, the cash flow statement.

Ensuring regulatory compliance

Many regulators require periodic reports that are accurate, transparent, and auditable. Account reconciliation ensures that financial reports meet regulatory standards and avoid compliance issues, and reassure investors that the statements are reliable.

Promoting fraud detection

A major reason for reconciliation is to detect possible misappropriation of funds or unauthorized transactions—for example, an employee cashing company checks that appear on a bank statement but not in the business’s general ledger.

Types of account reconciliation

• Bank reconciliation
• Customer reconciliation
• Supplier reconciliation
• Inventory reconciliation
• Credit card reconciliation
• General ledger reconciliation
• Balance sheet reconciliation

Many types of accounts are subject to reconciliation, depending on the size and complexity of a business. Key types of account reconciliation used by almost all businesses include:

Bank reconciliation

Bank reconciliation, the most common type of account reconciliation, deals with errors and timing differences in the recognition of payments and deposits. For example, a customer payment is recorded in the business’s ledger but hasn’t cleared yet and doesn’t appear on the bank statement. 

Customer reconciliation

Accounts receivable is the focus of customer reconciliation, which verifies that ledger records match customer account statements. Write-offs of bad customer debt must be subtracted from an allowance for uncollectible accounts, which reduces the value of accounts receivable. Mistakes in recording customer payments and credits may also lead to discrepancies that must be corrected and reconciled.

Supplier reconciliation

Supplier reconciliation, or vendor reconciliation, compares purchase and payment records with invoices and statements from suppliers. Accounts payable shows the money a business owes to suppliers and vendors, as well as employees. Regular accounts payable reconciliation is necessary to spot problems, such as short payments, disputes, or missed early payment discounts.

Inventory reconciliation

Inventory reconciliation compares physical stock counts with system records to identify and resolve discrepancies. This process accounts for spoilage, theft, damage, and misplacement, ensuring accurate inventory valuations on the balance sheet as well as proper calculation of cost of goods sold (COGS) on income statements. Allowance for obsolescence and valuation of inventory at cost or market price, whichever is lower, must be considered in the reconciliation processes. Discrepancies may indicate receiving, shipping, or internal control shortcomings that need improvement.

Credit card reconciliation

Credit card reconciliation matches ledger records of card transactions, including expense reports, with the monthly purchases statement from the card issuer. Account balances need to be reconciled to the appropriate payables account in the ledger. 

Credit card reconciliation is essential for corporate policy compliance for card use, expense management, and ensuring all business charges are properly documented and categorized. This can become challenging when employees use corporate cards for both business and personal expenses, requiring review of each transaction. This may reveal policy violations, missing receipts, or incorrect expense categorization, which can affect tax compliance and budget accuracy.

General ledger reconciliation

General ledger reconciliation checks that balances match underlying source documents, including receipts and invoices, to ensure the accuracy of a business’s chart of accounts and its transaction categories. Reconciliation involves creating detailed supporting schedules for each general ledger account, such as cash, sales revenue, accounts receivable, and rent expense. 

The general ledger reconciliation is central to preparing financial statements and is heavily scrutinized during internal audits. The account reconciliation process may reveal errors in posting or classifying transactions or missing journal entries, which can skew financial reports if not corrected.

Balance sheet reconciliation

Balance sheet reconciliation focuses on verifying overall account balances rather than individual transactions. It’s concerned with spotting errors that have built up across a period and aren’t so obvious day to day. This reconciliation ensures that all balance sheet accounts, culminating in the assets, liabilities, and owners’ equity line items, are properly supported and accurate. 

Accounts such as fixed assets, accumulated depreciation, accrued liabilities, and deferred revenue require review of beginning period balances, additions, reductions, and ending balances because they involve estimations of value and may need correction. This is crucial for audit preparation and for effective internal controls over financial reporting.

Manual vs. automated account reconciliation

Businesses may perform account reconciliation manually by reviewing ledgers and comparing entries against external documents such as receipts and invoices. Meanwhile, automated reconciliation uses accounting software to sort and track everything. Small businesses with relatively few transactions and ledger accounts may find manual account reconciliation feasible; for growing businesses with more transactions, tools like QuickBooks that include reconciliation are compelling, even necessary.

A manual account reconciliation process has some advantages. It’s hands-on, giving you direct control in comparing accounts and detecting any discrepancies. It’s also more flexible, inasmuch as accounting staff are able to handle transactions that don’t conform to any categories in an accounting software program.

On the other hand, manual account reconciliation is tedious and time-consuming, as accounting staff must gather documents, compare them, and spot discrepancies. Human error is more likely, leading to further corrections and adjustments in a business’s financial statements.

Automated reconciliation is faster, efficient, and scalable—it can easily handle a large transaction volume. Some reconciliation software programs include real-time monitoring of transactions, with updates and alerts. This makes financial statements more accurate and reliable. Potential challenges in using automation include cost and time to set up a program, risk of software glitches or incompatibility with your other business software, and inability to handle unusual transactions that require human review.

How to perform account reconciliation

1. Gather financial records
2. Compare ending balances
3. Investigate mismatches
4. Adjust general ledger entries
5. Record any new balances

The reconciliation process, particularly if it’s handled manually, typically involves the following steps:

1. Gather financial records

Collect external records such as bank and credit card statements, invoices, and receipts, as well as internal records, such as the general ledger and chart of accounts.

2. Compare ending balances

Compare ending balances in the ledger and external records. Each ledger transaction should match to a transaction in a bank statement or other external record.

3. Investigate mismatches

Look into any instance where transactions don’t match, and decide if a correction is needed. For example, a business enters a $1,000 payment to a vendor in its ledger, but the monthly bank statement shows only a $500 deduction. The business realizes that it wrote a $500 check and intended to pay the other $500 the following month. Its ledger cash balance showed $12,500 for the current month, while the bank statement showed $13,000.

4. Adjust general ledger entries

Make adjusted entries in the general ledger to reconcile it with the bank statement. Per the above example, the business corrects the monthly ledger to show a $500 reduction in the cash account, not $1,000, and adds back $500 to its accounts payable. This brings its cash balance in the ledger to $13,000, squaring it with the bank balance.

5. Record any new balances

Record the new balance in the general ledger. Document all procedures used for the reconciliation and save the results. This is important because the reconciled ledger is carried forward—the last month’s ending balance becomes the next period’s beginning balance. Audits of financial statements include review of account reconciliations.