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What Is Reconciliation?

How reconciliation works, types of reconciliation, what is single-entry bookkeeping, the bottom line.

• Corporate Finance

Reconciliation in Accounting: Meaning, Purposes, Types

Reconciliation is an accounting procedure that compares two sets of records to check that the figures are correct and in agreement. Reconciliation also confirms that accounts in a general ledger are consistent and complete. Reconciliation can be used for personal as well as business purposes.

Account reconciliation is particularly useful for explaining any differences between two financial records or account balances. Some differences may be acceptable because of the timing of payments and deposits. Unexplained or mysterious discrepancies, however, may warn of fraud or  cooking the books . Businesses and individuals may reconcile their records daily, monthly, quarterly, or annually.

Key Takeaways

• Companies use reconciliation to prevent balance sheet errors on their financial accounts, check for fraud, and make sure that transactions were appropriately booked to the general ledger.
• In double-entry accounting, each transaction is posted as both a debit and a credit.
• Individuals can also use reconciliation to check the accuracy of their bank and credit card account statements.

Investopedia / Joules Garcia

There is no standard way to perform an account reconciliation. However, generally accepted accounting principles (GAAP) require double-entry bookkeeping —where a transaction is entered into the general ledger in two places—making it the most prevalent tool for reconciliation among businesses.

In double-entry bookkeeping, every financial transaction is posted in two accounts: a credit account and a debit account. So, when a business makes a sale, it debits either cash or accounts receivable (on the balance sheet ) and credits sales revenue (on the income statement ). Reconciliation can be used to catch errors on either side of the entry. In the reconciliation, debits and credits should balance out to zero.

Banks and retailers frequently handle great deals of cash. These businesses can inadvertely make errors in counting money and issuing change to customers. Variances between expected and actual amounts are called  "cash-over-short."  This variance account is kept and reconciled as part of the company's income statement.

Similarly, when a business receives an invoice, it credits the amount of the invoice to accounts payable (on the balance sheet) and debits an expense (on the income statement) for the same amount. When the company pays the bill, it debits accounts payable and credits the cash account. Again, the left (debit) and right (credit) sides of the journal entry should agree, reconciling to zero.

As a simple example, suppose Mary starts a lawn care company. She uses $2,000 that she has in her personal savings to purchase equipment. She then uses the equipment to complete her first lawn-care project, which pays her $500.

Using a double-entry accounting system, as shown below, she credits cash for $2,000 and debits her assets, which is the equipment, by the same amount. For her first job, she credits $500 in revenue and debits the same amount for accounts receivable . Both her credits and debits are reconciled and equal the same amount.

It's also possible to make a double-entry journal entry that affects the balance sheet only. For example, if a business takes out a long-term loan for $10,000, its accountant would debit the cash account (an asset on the balance sheet) and credit the long-term debt account (a liability on the balance sheet).

Another way of performing a reconciliation is via the account conversion method. Here, records such as receipts or canceled checks are simply compared with the entries in the general ledger, in a manner similar to personal accounting reconciliations.

Reconciliation for individuals

Many people reconcile their checkbooks and credit card accounts periodically by comparing their written checks, debit card receipts, and credit card receipts with their bank and credit card statements.

This type of account reconciliation makes it possible to check for errors and detect any possible fraud. It's also a good way for someone to get an overall picture of their spending.

When an account is reconciled, the statement's transactions should match the account holder's records. For a checking account, it is important to factor in any outstanding checks or pending deposits.

Reconciliation for businesses

Companies need to reconcile their accounts to prevent balance sheet errors, check for possible fraud, and avoid adverse opinions from auditors . Companies generally perform balance sheet reconciliations each month, after the books are closed for the prior month. This type of account reconciliation involves reviewing all balance sheet accounts to make sure that transactions were appropriately booked into the correct general ledger account. It may be necessary to adjust some journal entries if they were booked incorrectly.

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 indirect method. GAAP requires that if the direct method is used, the company must still reconcile cash flows to the income statement and balance sheet.

If the indirect method is used, then the cash flow from the operations section is already presented as a reconciliation of the three financial statements. Other reconciliations turn non-GAAP measures, such as earnings before interest, taxes, depreciation, and amortization ( EBITDA ), into their GAAP-approved counterparts.

How Often Should a Business Reconcile Its Accounts?

Businesses are generally advised to reconcile their accounts at least monthly, but they can do so as often as they wish. Businesses that follow a risk-based approach to reconciliation will reconcile certain accounts more frequently than others, based on their greater likelihood of error.

How Often Should Individuals Reconcile Their Bank Statements?

It's a good idea to reconcile your checking account statement (or at least give it a careful look) when you receive it each month. One reason is that your liability for fraudulent transactions can depend on how promptly you report them to your bank.

The rules vary depending on whether the thief used just your account number or your physical ATM or debit card. In the first instance, you aren't responsible for any transactions you didn’t authorize as long as you report them within 60 calendar days after your statement was sent to you.

If your ATM or debt card was involved in a fraudulent transaction, your liability is limited to $50 if you notify the bank within two business days of noticing your card is missing, but rises to $500 after two days and up to 60 calendar days. After 60 days, the Federal Trade Commission (FTC) notes, you'll be liable for "All the money taken from your ATM/debit card account, and possibly more—for example, money in accounts linked to your debit account. "

In single-entry bookkeeping, every transaction is recorded just once (rather than twice, as in double-entry bookkeeping), as either income or an expense. Single-entry bookkeeping is less complicated than double-entry and may be adequate for smaller businesses. Companies with single-entry bookkeeping systems can perform a form of reconciliation by comparing invoices, receipts, and other documentation against the entries in their books.

Reconciliation serves an important purpose for businesses and individuals in preventing accounting errors and reducing the possibility of fraud.

Journal of Accountancy. " 6 Tips for Reconciliations ."

Federal Trade Commission Consumer Advice. " Lost or Stolen Credit, ATM, and Debit Cards ."

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What is a bank reconciliation statement?

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A bank reconciliation statement is a document prepared by a company that shows its recorded bank account balance matches the balance the bank lists. This statement includes all transactions, such as deposits and withdrawals, from a given timeframe.

Many companies produce bank reconciliation statements regularly to ensure they’ve recorded all their banking transactions properly and that their ending balance matches the amount the bank says it has.

Key takeaways

• Bank reconciliation statements are important tools for ensuring the accuracy of a company's financial records and detecting errors or fraud.
• The bank reconciliation process involves reviewing deposits and withdrawals, adjusting the cash balance, and accounting for interest and fees.
• Regularly creating bank reconciliation statements can help a business correct any discrepancies and better manage its cash flow and accounts payable and receivable.
• The frequency of bank reconciliation can vary based on a business' needs, but it is important to establish a routine schedule to ensure accuracy.

What is the purpose of a bank reconciliation statement?

Bank reconciliation statements can help identify accounting errors, discrepancies and fraud. For instance, if the company’s records indicate a payment was collected and deposited, yet the bank statement doesn’t show such a deposit, there may have been a mistake or fraud.

Making sure a company’s and its bank’s listed balances align is also a way to ensure the account has sufficient funds to cover company expenditures. The process also enables the company to record any interest payments the account has earned or fees the bank has charged.

The reconciliation process allows a business to understand its cash flow and manage its accounts payable and receivable.

How often should you reconcile your bank account?

The frequency of bank reconciliation can vary based on your business’ specific needs. Some businesses balance their bank accounts monthly, after receiving their monthly bank statements. However, businesses with a high transaction volume or increased fraud risk may need to reconcile more frequently, sometimes even daily. The key is to establish a routine that best suits your business’s unique needs and financial activity.

If you’re using accounting software, it may give you the option to connect your bank account so transactions are automatically downloaded and categorized. This can save you some time, although it’s important to periodically check everything manually to ensure its accuracy and that there are no bank errors.

How to do a bank reconciliation

Before sitting down to reconcile your business and bank records, gather your company ledger and the current and previous bank statements. You can get a template online to use for your bank reconciliation statement, or you can use a spreadsheet.

Step 1: Find the starting balance

If you’re doing a reconciliation every month, your starting balance will be the final balance from the previous month.

Step 2: Review the deposits and withdrawals

Check your ledger’s recorded deposits, withdrawals and cleared checks against those listed on the bank statement. Ensure all of the amounts match and investigate any discrepancies. Everything listed on the bank statement should be included in your records and vice versa.

Step 3: Adjust the cash balance

In your ledger balance, be sure to account for deposits that have yet to clear, as well as checks you’ve written that have yet to be cleared by the bank. The end result is the adjusted cash balance, which ensures your ledger balance matches the bank statement balance.

Step 4: Account for interest and fees

Search the bank statement for any interest your account earned during the month, then add it to your reconciliation statement. Also, deduct any penalties or fees the bank assessed that your ledger doesn’t list.

Step 5: Compare end balances

After reviewing all deposits and withdrawals, adjusting the cash balance and accounting for interest and fees, your ledger’s ending balance should match the bank statement balance. If the two balances differ, you’ll need to look through everything to find any discrepancies. These could turn out to be mistakes on your part or that of the bank.

Bank reconciliation example

Regularly creating a bank reconciliation statement allows you to find errors by comparing your company ledger with your bank statement. Then, you can correct your records as needed.

For instance, your ledger may have a current balance listed of $350,000. However, the bank statement lists an amount of $348,975. When comparing your records with those of the bank, you find that:

• A check written for $2,000 was inadvertently recorded in the ledger as $1,000.
• The bank charged a service fee of $50 that needs to be recorded in your ledger.
• The account earned $1,000 in interest that needs to be recorded in your ledger.

The table below illustrates how these three items could be added in to your ledger:

Bottom line

A bank reconciliation statement is important in managing your busines finances . This document can help ensure that your bank account has a sufficient balance to cover company expenses. It’s a tool for understanding your company’s cash flow and managing accounts payable and receivable. If you haven’t been using bank reconciliation statements, now is the best time to start.

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How to do bank reconciliation.

To do a bank reconciliation you would match the cash balances on the balance sheet to the corresponding amount on your bank statement, determining the differences between the two in order to make changes to the accounting records, resolve any discrepancies and identify fraudulent transactions.

What this article covers:

Bank Reconciliation: A Step-by-Step Guide

How to reconcile a bank statement, how often should you reconcile your bank account, purpose of bank reconciliation.

NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.

You receive a bank statement, typically at the end of each month, from the bank. The statement itemizes the cash and other deposits made into the checking account of the business. The statement also includes bank charges such as for account servicing fees.

Once you’ve received it, follow these steps to reconcile a bank statement:

1. Compare the Deposits

Match the deposits in the business records with those in the bank statement. Compare the amount of each deposit recorded in the debit side of the bank column of the cashbook with credit side of the bank statement and credit side of the bank column with the debit side of the bank statement. Mark the items appearing in both the records.

2. Adjust the Bank Statements

Adjust the balance on the bank statements to the corrected balance. For doing this, you must add deposits in transit, deduct outstanding checks and add/deduct bank errors.

Deposits in transit are amounts that are received and recorded by the business but are not yet recorded by the bank. They must be added to the bank statement.

Outstanding checks are those that have been written and recorded in cash account of the business but have not yet cleared the bank account. They need to be deducted from the bank balance. This often happens when the checks are written in the last few days of the month.

Bank errors are mistakes made by the bank while creating the bank statement. Common errors include entering an incorrect amount or omitting an amount from the bank statement. Compare the cash account’s general ledger to the bank statement to spot the errors.

3. Adjust the Cash Account

The next step is to adjust the cash balance in the business account.

Adjust the cash balances in the business account by adding interest or deducting monthly charges and overdraft fees. 

To do this, businesses need to take into account the bank charges, NSF checks and errors in accounting .

• Bank charges are service charges and fees deducted for the bank’s processing of the business’ checking account activity. This can include monthly charges or charges from overdrawing your account. They must be deducted from your cash account. If you’ve earned any interest on your bank account balance, they must be added to the cash account.
• An NSF (not sufficient funds) check is a check that has not been honored by the bank due to insufficient funds in the entity’s bank accounts. This means that the check amount has not been deposited in your bank account and hence needs to be deducted from your cash account records.
• Errors in the cash account result in an incorrect amount being entered or an amount being omitted from the records. The correction of the error will increase or decrease the cash account in the books.

4. Compare the Balances

After adjusting the balances as per the bank and as per the books, the adjusted amounts should be the same. If they are still not equal, you will have to repeat the process of reconciliation again.

Once the balances are equal, businesses need to prepare journal entries for the adjustments to the balance per books.

To reconcile a bank statement, the account balance as reported by the bank is compared to the general ledger of a business.

Businesses maintain a cash book to record both bank transactions as well as cash transactions. The cash column in the cash book shows the available cash while the bank column shows the cash at the bank.

Similarly, the bank too keeps an account for every customer. In the bank books, the deposits are recorded on the credit side while the withdrawals are recorded on the debit side. The bank sends the account statement to its customers every month or at regular intervals.

Sometimes these balances do not match. The business needs to identify the reasons for the discrepancy and reconcile the differences. This is done to confirm every item is accounted for and the ending balances match.

To do this, a reconciliation statement known as the bank reconciliation statement is prepared.

Ideally, you should reconcile your bank account each time you receive a statement from your bank. This is often done at the end of every month, weekly and even at the end of each day by businesses that have a large number of transactions.

Before the reconciliation process, business should ensure that they have recorded all transactions up to the end of your bank statement. Businesses that use online banking service can download the bank statements for the regular reconciliation process rather than having to manually enter the information.

The bank reconciliation process offers several advantages including:

• Detecting errors such as double payments, missed payments, calculation errors etc.
• Tracking and adding bank fees and penalties in the books
• Spot fraudulent transactions and theft
• Keeping track of accounts payable and receivables of the business

Bank reconciliation done through accounting software is easier and error-free. The bank transactions are imported automatically allowing you to match and categorize a large number of transactions at the click of a button. This makes the bank reconciliation process efficient and controllable.

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