Reconciliation of Books | Types, Best Practices | Useful Tips

Reconciliation of Books is the reconciliation carried out by the company before the closing of its books of accounts in order to ensure that the books are up to date and there is no manipulation or fraud in the books of accounts of the company.

Reconciliation of Books

As we all know, Books of Accounts are the blueprints of any business.  Maintaining the Books of Accounts is the key to financial management.

However, maintaining books of accounts is not enough. It is also necessary that the accounts should be accurate and complete. There are various checks and controls possible to ensure this, but one of the most basic and essential ways is “Reconciliation of Books.”

What is Reconciliation?

It is a process that compares two sets of records and analyses the differences between the two sets, if any.

reconciliation-of-books

These two sets of records can be anything from the entire gamut of Books of Accounts. Generally, one set of the record is a ledger from the company’s Books itself which needs to be reconciled and the second set of the record is obtained from internal or external sources.

e.g., comparing the bank book (internal source) vis-à-vis the bank statement (external source).

When is Reconciliation Done?

It is generally carried out before the closure of accounts. It is advisable to do it monthly so that the books are up-to-date, but they can also be done on a quarterly or annual basis.

Heavier the volume more should be the frequency of reconciliation so that the reconciliation processThe Reconciliation ProcessReconciliation is the process of comparing account balances to identify any financial inconsistencies, discrepancies, omissions, or even fraud. At the end of any accounting period, reconciliation involves matching balances and ensuring that debits (credits) from one account for one transaction is same as the credit (debits) to another account for the same transaction.read more is smoother.

They should be done on an annual basis before the Books are certified by the auditorsAuditorsAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws.read more. Most of the reconciliations are a pre-requisite for audit testingAudit TestingAn audit test is a set of control procedures or processes by the auditors, which involves taking a sample of similar transactions to gauge the accuracy and fairness of the financial statements prepared and presented to the stakeholders.read more purposes. Since the enactment of Sarbanes Oxley (SOX) in 2002, reconciliations have become even more critical as the compliance required has risen to a different level.

What is the period for which reconciliation is done?

One of the critical aspects to take care of while performing reconciliation is that the period for both sets of records should be the same.

In continuation with the example stated above, it is very illogical to compare bank book extracted for the period 01-Jan-16 to 31-Mar-16 to the bank statement for 01-Jan-16 to 30-Jun-16. There should be a common base for comparison.

Also, an essential thing to consider is that the Opening or Beginning balance should always be equal for both the set of records. In the above case, if the balances on 01-Jan-16 are not identical, this difference should first be rectified rather than going ahead with the reconciliation for 01-Jan-16 to 31-Mar-16.

Why should reconciliation be performed?

Detect fraud

  • It is easy to manipulate books of accounts. One way of detecting fraud is through reconciliation. Let us understand this with an example.
  • The cashier of ABC Corporation is committing fraud by not recording cash received from customers. By doing this, the customer and cash ledgers are unchanged, and he can pocket the cash received.
  • A simple way to detect frauds like this is to perform customer ledger reconciliation. When the Customer’s ledger in the Books of ABC is compared to ABC’s ledger in the customer’s Books, the balances will not tie, and the fraud will be detected.
reconciliation-process

Ensure records are complete:

  • At times, certain activities affect our books but not be routed through the accounts team and hence, may go undetected.
  • A small example is a cheque deposited by a customer directly in the bank account. If the customer does not inform, the bank ledger, as well as the customer ledger, will be incomplete, leading to a misrepresentation of facts.

Ensure records are accurate:

Best Practices for the reconciliation process

Some of the best practice which can be adopted so that reconciliation helps achieve its purpose is as follows:

  1. Companies should set up a Reconciliation Process to be followed internally. It should cover the frequency, key accounts for which reconciliation is to be done, standardized formats, etc. These processes will vary depending on the volume, type of industry, high-risk areas, etc. The policy should be prepared and circulated to the Finance & Accounts team regularly.
  2. Segregation of duties should be followed. It means that employees recording the entries in the books of accounts should not be a part of the reconciliation process. It will ensure that one rechecks the work done by another.
  3. Authority matrix for the maker-checker process should be followed. Reconciliation statements should also be prepared and checked by different employees based on the designation. The executive can prepare the reconciliation statement, and the Manager can check the same.
  4. Proper sign-off should be taken by the preparer and checker so that people feel responsible enough.
  5. Strict timelines for the completion of reconciliations should be set to detect frauds and to take timely actions.
  6. The scope of the internal auditInternal AuditInternal audit refers to the inspection conducted to assess and enhance the company's risk management efficacy, evaluate the different internal controls, and ensure that the company adheres to all the regulations. It helps the management and board of directors to identify and rectify the loopholes before the external audit.read more should also include checking of these reconciliation statements.
  7. The approval process should be set for passing rectification entries (if any discovered during the reconciliation process) for correcting accounts. It will ensure that middle and upper management is updated from time to time.
  8. Supporting documents (such as Bank Statement, Customer’s ledger, etc.) should form a part of the Reconciliation Statement on which sign-off is to be obtained.

How does a reconciliation statement look like?

A reconciliation statement should be as simple as possible. It should include necessary details such as which ledger is being reconciled, what is the period of reconciliation, when is the reconciliation prepared, who has prepared, checked, approved, etc.

The following is a simple format of the reconciliation statementReconciliation StatementA reconciliation statement contains a list of differences between bank balance as per bank statement, books of accounts, debtor-creditor reconciliation, debt balance reconciliation, or any other reconciliation with a difference in the records of two separate legal entities, and it aims at nullifying the difference.read more:

ABC Co.
Bank Reconciliation Statement as on 31-Mar-16
Bank Account No. 00000xxxxxx
Balance as per Books of Accounts on 31-Mar-16xxx
Add:Adjustment 1xxx
Adjustment 2xxx
Adjustment 3xxxxxx
Less:Adjustment 4xxx
Adjustment 5xxxxxx
Adjustment 6
Balance as per Bank Statement on 31-Mar-16xxx
Prepared By: Accountant
Checked By: Manager
Verified By: Finance Controller

Either of the two sets can be taken as the base and adjustments should be added or subtracted, thereby arriving at the balancing figure.

In the above format, Bank book is taken as the base. However, if the Bank Statement is considered as the base, all the adjustments will be reversed. Following two cases will help to understand this better:

Case A – Taking the Bank Book as the base

Balance as per Books of Accounts on 31-Mar-169,700
Add:Cheques issued but not deposited10,000
Bank Interested credited by Bank7510,075
Less:Bank Charges not recorded175175
Balance as per Bank Statement on 31-Mar-1619,600

Case B – Taking the Bank Statement as the base

Balance as per Bank Statement on 31-Mar-1619,600
Add:Bank Charges not recorded175175
Less:Cheques issued but not deposited10,000175
Bank Interested credited by Bank7510,075
Balance as per Books of Accounts on 31-Mar-169,700

What are the types of reconciliations

Basic reconciliation statements which are essential and prepared in day-to-day business accounting:

Reconciliation

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Source: Reconciliation of Books | Types, Best Practices | Useful Tips (wallstreetmojo.com)

  1. Bank reconciliation
  2. Vendor reconciliation
  3. Customer reconciliation
  4. Inter-company reconciliation
  5. Business-specific reconciliation

We will discuss each of these statements in detail:

#1 – Bank reconciliation

A bank reconciliation statement is prepared concerning actual transactions reflected in the bank statement vis-à-vis transactions recorded in our bank book.

Some of the reasons for the difference between the bank book and bank statement are:

  1. Cheque issued to a vendor but presented at a later date

(At times, there are cheques which appear in the bank statement which are very old. They are stale and cannot even be deposited anymore. It is better to write them offWrite Them OffWrite off is the reduction in the value of the assets that were present in the books of accounts of the company on a particular period of time and are recorded as the accounting expense against the payment not received or the losses on the assets.read more and keep the Bank Book clear.)

  1. The amount deposited by a customer directly in our bank account
  2. Bank interest credited by the bank
  3. Bank charges debited by the bank
  4. Bank errors (Although rare, mistakes can happen by data entry errors are also possible by the bank)

reconciliationAll payment and receipt related activities are tracked through the bank book. Reconciling it helps to keep it updated.

To make our lives easier, most of the accounting ERPs have built-in features that help to extract the bank reconciliation statement directly.

The basic concept used in these ERPs is recording the “bank date” for each transaction. A bank date is a date on which the transaction is reflected in the bank statement. ERP extracts a report based on the “Document Date” vis-à-vis “Bank Date.”

#2 – Vendor reconciliation

A vendor reconciliation statement is prepared to make sure that the accounting entries passed in the books of the vendor are in line with the accounting entries passed in our books.

Reasons for deviations are as follows:

  1. The Vendor may not book purchase returns booked by us.
  2. Cheques issued by us may not be reflected in their books. It generally happens when the cheque is misplaced or lost in transit.
  3. Goods-in-transit not recorded by us but recorded by the vendor;

#3 – Customer reconciliation

A customer reconciliation statement is very similar to vendor reconciliation. It is prepared to check if the customer’s books are in sync with our books. Most corporate treat customer reconciliation as a priority over vendor reconciliation. It is because money is receivable from customers, and it is always better to reconcile so that the payments are not pending on account of some issues with regards to accounting entries.

Reasons for deviations are as follows:

  1. Returns booked by customers are not appearing in our books.
  2. Taxes deducted by the customer not accounted for in our books.
  3. Goods-in-transit recorded as the sale in our ledger.
  4. Payments directly transferred to our bank account not recorded.

A good practice is to perform monthly reconciliations of customers on a rotational basis. Let us that a corporate has 100 odd customers, and reconciliations of around 10-15 customer ledgers should be done every month.

Also, once the reconciliation is complete and certified by both the parties, a balance confirmation certificate for the given period can be issued. It will ensure that the opening balances need not be rechecked. It also helps to resolve disputes.

#4 – Inter-company reconciliation

Group companies (Holding, subsidiary, etc.) have to prepare consolidated Books of Accounts. These Books need to eliminate inter-company transactions such as sale from Holding Co. to its Subsidiary Co. For this, it becomes utmost important that their Books of Accounts are always in sync and hence, should be reconciled regularly before the consolidation process is done.

#5 – Business specific reconciliation

Every business will have to prepare other reconciliations over and above the basic ones mentioned above. An example of this is the Costs of Goods reconciliation

This reconciliation will not apply to the service industry as they do not hold inventory. However, it is vital for businesses that hold inventory.

What is the cost of goods soldCost Of Goods SoldThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.read more?

Cost of goods sold = Opening StockOpening StockOpening Stock is the initial quantity of goods held by an organization during the start of any financial year or accounting period. It is equal to the previous accounting period's closing stock, valued in accordance with appropriate accounting standards based on the nature of the business.read more + Purchases – Closing Stock

Cost of goods sold = Sale – Profit

Either of the two methods can arrive at the cost of goods. Both need to be the same amount. If not, a reconciliation statement should be prepared to find out reasons for differences. Also, physical verification of the Closing Stock should be carried out, and the same should be reconciled to the Closing StockClosing StockClosing stock or inventory is the amount that a company still has on its hand at the end of a financial period. It may include products getting processed or are produced but not sold. Raw materials, work in progress, and final goods are all included on a broad level.read more appearing in the Books of Accounts.

Reconciliation of Books Video

Useful tips for MS Excel while performing reconciliations


  1. A standardized template should be prepared with all essential formulae in Excel. (Format illustrated above can be used)
  2. In the case of Vendor / Customer reconciliation, Invoice No. acts as a standard field which can be taken as a base for performing Vlookup function and making the reconciliation process more straightforward. Make sure to do a paste specialPaste SpecialPaste special in Excel allows you to paste partial aspects of the data copied. There are several ways to paste special in Excel, including right-clicking on the target cell and selecting paste special, or using a shortcut such as CTRL+ALT+V or ALT+E+S.read more after using Excel Vlookup Function.
  3. Filter out debit and credit entries separately and reconcile them individually. Another way to separate entries is to filter them on the type, i.e., Payments, Invoices, Returns, Other Adjustments. Reconciling these separately and then adding up the differences will prove to be helpful.

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Comments

  1. Kenneth Holland says

    I am a big fan for your work Sir. I frequently read all your articles and they are really very good. Thanks for posting. Any books on excel to learn much better?

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