Reconciliation
Reconciliation is the process of comparing two sets of records to ensure they agree. It's critical for catching errors, preventing fraud, and ensuring accurate financial statements.
Why Reconcile?
- Catch errors: Identify recording mistakes
- Detect fraud: Spot unauthorized transactions
- Ensure accuracy: Verify account balances
- Meet requirements: Comply with auditing standards
- Build confidence: Trust your financial data
Bank Reconciliation
Frequency
Minimum: Monthly (when bank statement arrives) Best practice: Weekly or even daily for large operations
Basic Steps
- Compare bank statement to your books
- Identify differences
- Make adjusting entries
- Verify balances match
Common Differences
Outstanding Checks
- Checks written but not yet cashed
- Deduct from bank balance
Deposits in Transit
- Deposits recorded but not yet credited by bank
- Add to bank balance
Bank Fees
- Service charges, overdraft fees
- Record in your books
Interest Earned
- Interest credited by bank
- Record in your books
NSF (Bounced) Checks
- Customer checks that bounced
- Reverse in your books
Bank Errors
- Rare but possible
- Contact bank to correct
Reconciliation Example
Bank Statement Balance $25,430 Less: Outstanding checks ($1,200) Add: Deposits in transit $2,500 Adjusted Bank Balance $26,730
Book Balance $27,150 Less: Bank fees ($20) Less: NSF check ($400) Adjusted Book Balance $26,730
✓ Balances match!
Credit Card Reconciliation
Similar process to bank reconciliation:
- Compare statement to your records
- Verify all charges are recorded
- Note any interest or fees
- Check for unauthorized charges
- Make adjusting entries
- Confirm balances agree
Accounts Receivable Reconciliation
Compare customer balances to detail:
Total A/R per General Ledger: $45,000
Customer Detail:
- Customer A: $15,000
- Customer B: $20,000
- Customer C: $10,000 Total Customer Balances: $45,000
✓ Reconciled!
Accounts Payable Reconciliation
Compare vendor balances to detail and statements:
- Match vendor statements to your records
- Verify all invoices recorded
- Check for duplicate entries
- Confirm payment status
Inventory Reconciliation
Compare physical count to book records:
Per Books: 500 units @ $10 = $5,000 Physical Count: 485 units @ $10 = $4,850 Difference: 15 units missing (shrinkage)
Adjusting Entry:
Debit: Cost of Goods Sold (or Shrinkage) $150
Credit: Inventory $150
Best Practices
- Do it regularly - Don't skip months
- Do it promptly - Within days of month-end
- Document everything - Keep reconciliation records
- Investigate discrepancies - Don't ignore differences
- Get help if needed - Don't struggle alone
Common Reconciliation Mistakes
| Mistake | Solution |
|---|---|
| Waiting too long | Reconcile monthly minimum |
| Ignoring small differences | Investigate all variances |
| Not recording adjustments | Make entries immediately |
| Poor documentation | Keep detailed records |
| Rushing the process | Take time to be thorough |
Tools and Software
Most accounting software includes:
- Automatic bank feed matching
- Reconciliation workflows
- Historical reconciliation reports
- Multi-user collaboration
Next Steps
Learn about adjusting entries that ensure your books reflect economic reality at period-end.