Reconciling Account Definition
Reconciling Account is a process that is followed to make sure that the account’s ending balance is correct. The general rule of accounting is to pass the journal entries first, then to prepare individual ledgers. The accounting ledgers reflect an ending balance that is tallied by the reconciliation of the accounts with other statements and documentation.
How does Reconciling Account Work?
Reconciliation is a step by step process which include as follows –
Step #1 – Gathering Bank Statement and Tallying with Cash Book
Cash Book is the internal record keeping that all businesses maintain to keep a record of all the monetary transactions. So you need to start tallying both the accounts. If you see that there is any transaction that is present in the Bank Statement, but it is not there in the cash book, then highlight that transaction. See if all the transactions have a supporting receipt, such as Invoice. The ending balance of cash bookCash BookThe Cash Book is the book that records all cash receipts and payments, including funds deposited in the bank and funds withdrawn from the bank according to the transaction date. All the transaction which is recorded in the cash book has the two sides i.e., debit and credit.read more and bank statement should match.
Step #2 – Now Try to Analyze the Discrepancies
If you see that the bank statement is showing lesser balance than Cashbook, then try to find the reasons. It could be that the bank has deducted certain charges like current account charges, ATM withdrawal charges, etc. If those charges are not included in the cash book, then include them. If you have received interest from a bank due to capital and that interest is not reflecting in your cash book, then include that interest. Go through all the discrepancies that arrived, and if they are valid, then add them to respective books.
Step #3 – Start Doing Proper Audit of the Bank Statement
At times it may happen that the bank wrongly charges you with some fee. So this kind of error should be communicated with the bank immediately, and a proper note should be maintained. Proper follow-ups should be maintained with the bank until and unless the error resolves.
Step #4 – Tally Ending Balances of Both Cash Book and Bank Statement
It is the most crucial step. The final balances of the Cashbook and Bank Statement should tally as all necessary adjustments are already made. After this, a bank reconciliation statement is formulated, which explains the reason for the discrepancy between the two books.
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Types
Reconciling can be done on any accounts. Every ledger accountsLedger AccountsLedger in Accounting, also called the Second Book of Entry, is a book that summarizes all the journal entries in the form of debits & credits to use for future reference & create financial statements. read more should be reconciled from source to make the balance trustworthy.
#1 – Bank Reconciliation
It is where you reconcile the internal cash book with the bank statement to make sure that the cash transactions are correctly recorded without errors.
#2 – Creditors Account Reconciliation
All the transactions under Accounts PayableAccounts PayableAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.read more are systematically tallied with statements received from creditors, and the final balance is tallied
#3 – Debtors Account Reconciliation
All the debtors’ statements are tallied with accounts receivableAccounts ReceivableAccounts receivables refer to the amount due on the customers for the credit sales of the products or services made by the company to them. It appears as a current asset in the corporate balance sheet.read more, and discrepancies are resolved.
How to Reconcile an Account?
There are two ways to reconcile an account –
#1 – Documentation Review
This method is very popular. Here each recorded transaction is tallied by proper documentation. Say you are reconciling Accounts Payable, then each transaction will be tallied by appropriate invoices, and it will check whether the transactions are correct or not. Missing transactions are also identified this way, i.e., if there is an invoice, and it is not recorded in the books.
#2 – Analytical Review
This method is more of an estimation. Account balancesAccount BalancesAccount Balance is the amount of money in a person's financial account, such as a savings or checking account, at any given time. Furthermore, it can refer to the total amount of money owed to a third party, such as a utility company, credit card company, mortgage banker, or other similar lender or creditor.read more of prior periods are checked, and an estimate is done for the current year. If the account balance is not reflecting as per prediction, then further analysis is done. It is helpful when reconciling depreciation accounts. Depreciation is more or less the same each year. So if any movement is observed compared to the previous year, then the analysis is done.
Example
Mr. X is preparing its balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more and is doing the reconciliation of each account. He is currently working on Accounts payable. How will he reconcile it?
Solution
Accounts payable account consists of all the pending payments for Mr. X. So whatever Mr. X bought on credit will reflect in this account. Say there are five entries in this account. The total balance of the account is $10,000. So Mr. X owes $10,000 to his suppliers. As Mr. X is maintaining an account for Accounts Payable, thus the suppliers are also maintaining an Accounts Receivable account.
Mr. X will ask for the final customized bill from each supplier and check whether the amount is adding up to $10,000. If there is any discrepancy, that the supplier has added extra payment, then Mr. X should immediately contact them and get it fixed. So once the reconciliation is done. Then the balance of Accounts payable can be trusted.
Need
Every business maintains internal accounts. So after the end of the period, the balances of the accounts portray a picture. Say the Accounts receivable account shows that $5,000 is receivable. So if the company has not done reconciliation, then they may start operating, thinking that they will receive $5,000. While reconciliation, it was found that the correct amount is $3,000. So reconciliation helps to eradicate uncertainty. Once reconciliationReconciliationReconciliation 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 done, the account balances can be trusted.
Conclusion
Reconciling accounts is extremely important for businesses as it helps to create a trust on the balances reflected by each account. Proper reconciliation is always advised. Storage of all essential documentation is vital in case of reconciliation.
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