Accounting reconciliation: What it is and how its done

This process requires you to compare internal records at the beginning and end of a financial cycle. It will let you see if the goods you sold or services you provided match up with your internal records. The document review method involves reviewing existing transactions or documents to make sure that the amount recorded is the amount that was actually spent. Inventory reconciliation makes sure that physical inventory counts align with your general ledger. It accounts for transactions related to inventory and accounts payable and reconciles discrepancies.

The mechanics of account reconciliation

This generally takes place at the end of the month as part of the account closing process. This would be immediately before a business puts out its monthly financial statements. We refer to them as bank, vendor, customer, business-specific, and intercompany reconciliation. There are also new-age reconciliation solutions that can handle any account reconciliation with ease and accuracy.

What is a three-way reconciliation in accounting?

1. These should match up with external accounts like bank statements for month-end reconciliation.
2. Once you have access to all the necessary records, you need to reconcile, or compare, the internal trust account’s ledger to individual client ledgers.
3. For example, a transaction that may not yet have cleared the trust bank account could be recorded in the client ledger, but may not yet be visible on the trust account bank statement.
4. General ledger reconciliation, where accountants check the accuracy of the company’s account balances at the end of an accounting period, ensures the accuracy of financial statements.
5. Some reconciliations are necessary to ensure that cash inflows and outflows concur between the income statement, balance sheet, and cash flow statement.

And the end result is always prepaid lease agreements to find a zero balance between the 2 sets of figures. Given below are some other reconciliation types that we normally come across in the financial world.

In this article, we’ll simplify the complexities of account reconciliation to give you a clear understanding of its role in your business’s financial health. Balancing financial records is a fundamental principle in any company or business. A company may issue a check and record the transaction as a cash deduction in the cash register, but it may take some time before the check is presented to the bank.

This is critical because any discrepancies left unaddressed could distort a company’s understanding of its financial health. In a general sense, it demonstrates that balancing the books gets taken seriously. That can be vital should a company need to borrow, attract investors, or even put itself up for sale. A company would then be able to put right any mistakes in its financial statement. The result would give a far more accurate picture of the company’s true financial status.

What are the two basic methods of account reconciliation?

This practice helps identify and rectify discrepancies, including missing transactions. In essence, reconciliation acts as a month-end internal control, making sure your sets of records are error-free. The reconciliation process involves comparing internal financial records with external documents to identify and correct discrepancies.

Vendor reconciliation

Conversely, identify any charges appearing in the bank statement but that have not been captured in the internal cash register. Some of the possible charges include ATM transaction charges, check-printing fees, overdrafts, bank interest, etc. The charges have already been recorded by the bank, but the company does not know about them until the bank statement has been received. 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. Identify any transactions in the bank statement that are not backed up by any evidence.

They can then look for errors in the accounting records for customers and correct these when necessary. Periodic bank reconciliation is important to spot missed payments and calculation mistakes. It will also help identify theft and fraud and track accounts payables and receivables.

Some reconciliations are necessary to ensure that cash inflows and outflows concur between the income statement, balance sheet, and cash flow statement. Cash flow can be calculated through either a direct method or an indirect method. GAAP requires that if the direct method is used, the company must reconcile cash flows to the income statement and balance sheet. Once you have access to all the necessary records, you need to reconcile, or compare, the internal trust account’s ledger to individual client ledgers. In the following post, we’ll cover the crucial types of reconciliation for legal professionals and delve into the fundamentals of three-way reconciliation accounting. Plus, we’ll offer useful best practices for reconciliation in accounting for lawyers to help make the process easier, more effective, and more efficient.