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Account reconciliation is the process of reconciling an account balance against a set of financial records to ensure that the balance is complete and accurate.
Typically, account reconciliation involves comparing financial records from different sources—such as bank statements versus internal accounting records—against each other to identify and resolve any discrepancies.
For account reconciliation, the process usually involves comparing the general ledger balance of an account against an additional external or internal system of record to verify that the balance in the account in question is correct.
The goal of account reconciliation specifically is to reconcile the balance of a given account. While it is very similar to both transaction reconciliation and balance reconciliation, account reconciliation focuses on reconciling the overall balance or activity within an account rather than reconciling the individual transactions themselves.
The process of account reconciliation is crucial for identifying discrepancies or errors in accounts and resolving them to maintain the integrity of financial data, successfully close the books, and accurately produce financial statements and documents relevant to the business. Account reconciliation is also an important part of helping businesses to detect and prevent fraud, prepare for annual tax filings, and comply with any necessary financial regulations.
Account reconciliation is generally performed on a regular basis, generally monthly and at the end of a given accounting period.
What are the Different Types of Account Reconciliation?
Account reconciliation is applicable to a wide variety of different types of reconciliation, depending on the situation, including:
- Bank Reconciliation: Looking at bank transactions and statements (withdrawals and deposits, checks, electronic payments, etc.) and then reconciling those transactions against the business’ own ledger.
- Vendor Reconciliation: Comparing the transaction records of a vendor or supplier against the business’ own ledger.
- Intercompany Reconciliation: Reconciling statements and transactions between different entities within the same parent company.
- Business Specific Reconciliation: Looking at transactions for a specific business unit.
- Petty Cash Reconciliation: Verifying the accuracy of all transactions in a petty cash fund.
- Credit Card Reconciliation: Reconciling purchase receipts from a card company against internal purchase records for the given cards.
How Does Account Reconciliation Work?
There are two basic approaches to account reconciliation:
Document Review: This is reconciliation completed by comparing the business’s financial records against source documents for the account at hand, such as receipts, invoices, or other financial statements. Very similar to transaction reconciliation, this type of account reconciliation aims to identify any discrepancies between the internal and external records for the account.
Historical Analysis: This is reconciliation completed by comparing historical records of the account in question with the current records for the account. By comparing the historical records and projections against the current balance, this type of account reconciliation can identify potential discrepancies within the account.
As with all types of reconciliation, any discrepancies will need to be investigated to determine their cause and corrected to ensure that the account reconciliation is complete and accurate.
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