Definition of account reconciliation


What is account reconciliation?

Account reconciliation is the process of confirming that two separate transaction records in an account are the same. Both institutions and individuals carry out the reconciliation of accounts. At the institutional level, banks and brokers must internally review transactions between their general ledger entries and individual account records.

Account reconciliation can help organizations identify accounting errors that could indicate errors, miscalculations, or cash losses. Thanks to computer automation, this process is much faster than it was before.

Key takeaways

  • Account reconciliation is the process of confirming that two separate transaction records in an account are the same.
  • Institutions and individuals perform account reconciliation to balance check stubs and ensure that records match statements.
  • Account reconciliation can help organizations identify accounting errors that could indicate errors, fraud, miscalculations, or cash leaks.
  • Bank and corporate account reconciliation is a regulatory and compliance function. The Sarbanes-Oxley Act of 2002 established parameters for the reconciliation of corporate accounts.
  • Account reconciliation for individuals can help you recognize late payments, not receive a refund, overcharging, or possible theft or fraud.

Understanding reconciliation of accounts

Reconciliation of accounts within financial institutions and corporations is a key regulatory and compliance function, and is a primary focus for external regulators in their routine audits of a business. For larger institutions, external third parties are often hired to perform account reconciliations.

Depending on their review of the company, the auditors will issue an opinion on the financial statements of a company. Customers of these companies must also keep accurate records and report discrepancies promptly.

The Sarbanes-Oxley Act of 2002 established parameters for the reconciliation of corporate accounts. Before Sarbanes-Oxley, accounting standards did not take into account the need for best practices for reconciling accounts. Now companies are held to much higher standards for internal controls and auditing procedures.

With the advent of computerized systems to record customer transactions and positions, reconciliation often amounts to fixing small discrepancies of a few dollars, or even pennies, between one source and another. The longer an error is discovered, the more difficult it is to reconcile the two records.

Reconciliation also occurs when a customer of a bank or broker confirms that their personal records match what is reported in periodic account statements. At the individual level, balancing a checkbook is a form of account reconciliation. The term can also refer to the balancing of a company’s books and records with software programs and data entry, which provides a level of objectivity to the review.

Account reconciliations allow an immense number of discoveries, from recognizing missed payments to not receiving a refund, overcharging, possible theft or fraud, etc. Account reconciliation is a prudent practice that all individuals and businesses should perform on a regular basis.

Account reconciliation process

At the organizational level, account reconciliation can be done following a simplified process. First, all the necessary accounting information must be collected. The company’s bank statements are then compared to the general ledger. Any outstanding deductions on the company’s ledger should be deducted from the ending balance, and any outstanding deposits should be added to the ending balance.

If the account accrues interest, it must be calculated. Outstanding checks should be deducted, as should banking errors, such as inaccurate debits or credits, and banking service fees. Finally, both the business statement and the general ledger should show the same ending balance. Any errors left at the end of the process should be investigated by verifying that each transaction is posted to the general ledger and that outstanding deposits and outstanding checks are accounted for.

People can reconcile their personal accounts through a similar process. Instead of a general ledger, they would compare your bank statements or other financial account statements to a personal record of debits and credits, such as a checkbook register. However, thanks to the advent of online banking and the decline of paper checks, many people no longer reconcile most of their financial accounts and rely on their banks to display the correct ending balance on banking portals. online.

Still, banks can make mistakes and are only transactional. To ensure that monetary amounts are correct and that the correct funds are flowing in and out of an account, account reconciliation can provide many insights.

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Mark Holland

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