What Is Reconciliation in Accounting? Definition, Types & Steps
It provides an opportunity to record their cash position and forecast their cash flow with a higher degree of accuracy. The important thing is to establish internal processes for account reconciliation and adhere to those processes. Accounting software automation and adding a procure-to-pay software, like PLANERGY, can streamline the process and increase how to write a profit and loss statement functionality by automatically accessing the appropriate financial records. Account reconciliation is a financial reconciliation, with no real difference, except for how the results of the reconciliation process will be used. Reconciliation in accounting is the process of reconciling the balance between two different sets of documents.
What is Reconciliation in Accounting?
It is prudent to reconcile credit card accounts and checkbooks on a regular basis, for example. This is done by comparing debit card receipts or check copies with a person’s bank statements. The reconciliation process balances 2 sets of figures with the aim of both being equal.
Here, they’d match records like receipts or cheques with entries in the general ledger. This is a bit like carrying out a personal accounting reconciliation using credit card receipts and a statement. Thirdly, account reconciliation is vital to ensure the validity and accuracy of financial statements. Individual transactions are the building blocks of financial statements, and it is essential to verify all transactions before relying on them to produce the statements. For instance, while performing an account reconciliation for a credit card clearing account, it may be noted that the general ledger balance is $260,000.
Methods
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. Today, most accounting software applications will perform much of the bank reconciliation process for you, but it’s still important to regularly review your statements for errors and discrepancies that may appear. Bank reconciliations involve comparing the business’s financial statements with the statements it receives from the bank. This helps to ensure that the business’s records accurately reflect the transactions that have taken place in its bank account.
And, because Clio integrates with best-in-class accounting tools like QuickBooks and Xero, you can use them together to further simplify reconciliations. When using Clio together with these integrated accounting solutions, trust account updates made in Clio are then automatically updated in QuickBooks or Xero. It’s also important to ensure you maintain detailed records of the three-way reconciliation accounting process. This is true for both businesses and individuals, who should both verify every transaction individually, making sure the amounts match perfectly, and, if not, making note of any differences that need further investigation. Reconciling your bank statement can help you avoid bounced checks (or failing to make electronic payments) to partners and suppliers.
The differences may sometimes be acceptable due to the timing of payments and deposits, but any unexplained differences may point to potential theft or misuse of funds. The objective of doing reconciliations to make sure that the internal cash register agrees with the bank statement. Once any differences have been identified and rectified, both internal and external records should be equal in order to demonstrate good financial health. By prioritizing reconciliation in accounting, lawyers and law firms can maintain financial accuracy and compliance, but that doesn’t mean that lawyers need to spend hours each day looking at accounts on paper or in Excel. By leveraging technology for more efficient reconciliation processes, lawyers can save time and greatly reduce the chance of error.
What Is Account Reconciliation?
Every transaction is recorded in two accounts (debit in one and credit in another) in the books of accounts. In most cases, account reconciliations are performed against the general ledger. This is because the general ledger is considered the master source of financial records for the business. By performing reconciliations against the general ledger, the company can ensure that its financial records are accurate and up-to-date. A bank error is an incorrect debit or credit on the bank statement of a check or deposit recorded in the wrong account. Bank errors are infrequent, but the company should contact the bank immediately to report the errors.
- Duplicate checks, unauthorized credit card activity, or altered invoices are some common practices that can be identified through account reconciliation.
- Make a list of all transactions in the bank statement that are not supported, i.e., are not supported by any evidence, such as a payment receipt.
- While proper reconciliation is the standard for how law firms should handle all financial accounts, it is particularly important—and often required—for the management of trust accounts.
For example, Company XYZ is an investment fund that acquires at least three to five start-up companies each year. For the current year, the company estimates that annual revenue will be $100 million, based on its historical account activity. The company’s current revenue is $9 million, which is way too low compared to the company’s projection. For example, a company can estimate the amount of expected bad debts in the receivable account to see if it is close to the balance in the allowance for doubtful accounts. The expected bad debts are estimated based on the historical activity levels of the bad debts allowance. The type of industry tends to determine the specifics related to this reconciliation.
