{"id":153904,"date":"2024-01-19T17:13:55","date_gmt":"2024-01-19T17:13:55","guid":{"rendered":"https:\/\/www.techopedia.com\/?post_type=definition&p=153904"},"modified":"2024-02-07T12:26:30","modified_gmt":"2024-02-07T12:26:30","slug":"what-is-reconciliation-in-accounting","status":"publish","type":"definition","link":"https:\/\/www.techopedia.com\/definition\/what-is-reconciliation-in-accounting","title":{"rendered":"Accounting Reconciliation"},"content":{"rendered":"

What is Accounting Reconciliation?<\/span><\/h2>\n

Reconciliation in accounting is a procedure in which you or your accountant compare two sets of records\u2013like a bank statement and your general ledger\u2013to ensure that the numbers match up. The process is typically performed monthly, but you can also perform account reconciliations daily, quarterly, or even annually, depending on your company\u2019s needs.<\/p>\n

The underlying aim of the reconciliation is to ensure your finances are as they should be: that the amount of money you\u2019ve spent and earned as an organization is accurate and complete. Any discrepancies could indicate human error, missed payments, or even fraudulent activity, which underscores just why reconciliation in accounting is so important.<\/p>\n

How Does Reconciliation in Accounting Work?<\/span><\/h2>\n

Reconciliation in accounting might sound complex, but the task simply involves contrasting two pieces of data\u2013 typically an internal financial document like your general ledger and an external one from the bank, a supplier, or a client\u2013to ensure that they correlate with each other.<\/p>\n

While performing account reconciliations used to be a manual, time-intensive endeavor, with the rise of cloud-based accounting software<\/a>, it\u2019s easier than ever to perform an accounting reconciliation. Instead of having to manually compare datasheets, organizations can now use technology to automate and speed up the reconciliation process, making it touch-free, automatic, and real-time.<\/p>\n

The Different Types of Reconciliation<\/span><\/h2>\n

Accounting reconciliation is a broad-scale term with several subcategories. Here\u2019s a look at the different types you, your accountant, or your accounting software platform can perform.<\/p>\n

As mentioned, how often you perform these reconciliations will depend on the nature of your business. Saying this, the general gold standard to aim for is once a month. Any longer than this, you risk missing out on discrepancies, creating more work for yourself in the long run.<\/p>\n

Note that, for each type of reconciliation, there\u2019s a follow-up process to use if you notice any discrepancies between the two amounts. We go over that towards the bottom of this article with our step-by-step process for performing an account reconciliation.<\/p>\n

Bank Reconciliation<\/h3>\n

A bank reconciliation is the most common type of account reconciliation you will perform. It involves cross-checking the transactions<\/a> in your company’s bank statement to your own general ledger to make sure the amounts match.<\/p>\n

Accounts Receivable Reconciliation<\/h3>\n

If your bank reconciliation doesn\u2019t add up, it might make sense to then perform an accounts receivable and accounts payable reconciliation. With the first type of reconciliation, you will compare your clients\u2019 unpaid invoices with the accounts receivable total recorded in your general ledger to ensure the amounts are the same.<\/p>\n

Accounts Payable Reconciliation<\/h3>\n

The accounts payable reconciliation process involves assessing the accounts payable balance (the amount you owe to your suppliers) in your general ledger with your supplier invoices to ensure everything matches up.<\/p>\n

Intercompany Reconciliation<\/h3>\n

If your business has franchises or subsidiaries, then performing intercompany reconciliations will also be crucial. With this form of reconciliation, you\u2019ll look to verify intercompany transactions to eliminate the risk of double entry and ensure accuracy.<\/p>\n

Inventory Reconciliation<\/h3>\n

Inventory reconciliation is the process of verifying that your physical inventory matches your recorded data. If you\u2019re a service-based business, this won\u2019t apply to you. But, for retailers and product-based businesses, this reconciliation is vital to perform regularly.<\/p>\n

General Ledger Reconciliation<\/h3>\n

For the uninitiated, your general ledger is basically your company\u2019s primary accounting record. The general ledger reconciliation aims to verify the validity of the ledger, ensuring that the transactions included are correct and complete.<\/p>\n

To achieve this, you\u2013or your accountant\u2013will compare the general ledger to various source documentation like your bank account statement, invoices, and so forth.<\/p>\n

Payroll Reconciliation<\/h3>\n

If your business has employees on the payroll, then you\u2019ll want to make payroll reconciliations part of your end-of-month process. With this form of reconciliation, the objective is to confirm that your employees are being paid the right amount.<\/p>\n

It\u2019s achieved by contrasting your general ledger with your payroll register and double-checking that all payroll data is correct.<\/p>\n

Fixed Asset Reconciliation<\/h3>\n

A fixed asset, also known as a non-current asset, is a piece of property, software, or equipment that your business has purchased for long-term use, meaning you don\u2019t plan to sell it or convert it to cash within the accounting calendar year.<\/p>\n

Of course, most assets appreciate or depreciate over time, and that\u2019s why fixed asset reconciliation is so important. With this process, you\u2019ll compare your fixed asset register with your general ledger to ensure all figures are correct. By doing this, you\u2019ll be able to ensure depreciation is accounted for, that assets are correctly logged, and that the purchase of new assets is necessary.<\/p>\n

Tax Reconciliation<\/h3>\n

Tax reconciliations are imperative to ensure you don\u2019t under or overpay tax. This form of reconciliation involves comparing your tax records, like sales tax and income tax, with your bank statements, invoices, and expenses to ensure your tax liability is correct.<\/p>\n

Real-time Automatic Reconciliation<\/h3>\n

Real-time automatic reconciliation features are typically provided by accounting software platform providers. They use the power of artificial intelligence to streamline and enhance the reconciliation process, enabling you (or your accountant!) to use software to do the hard work for you.<\/p>\n

Benefits of Account Reconciliation For Your Business<\/span><\/h2>\n

Accounting reconciliation is an essential process for sole traders and businesses, large and small. Here\u2019s why:<\/p>\n