At its core, account reconciliation is the accounting process used to confirm that the balance in a general ledger account is complete, accurate, and matches the supporting documentation or external statements.
Think of it as the "fact-checking" phase of bookkeeping. It ensures that the money you think you have (according to your internal records) matches the money you actually have (according to the bank or other third parties).
Key Components
- General Ledger (GL): The primary record where a company’s financial transactions are stored.
- External Documentation: Independent records used for verification, such as bank statements, credit card statements, or invoices.
- Discrepancy/Variance: A difference between the two sets of records that must be investigated.
The Reconciliation Process
- Comparison: Matching the internal ledger entries against external statements.
- Identification: Spotting transactions that appear in one record but not the other (e.g., checks that haven't cleared yet).
- Adjustment: Recording journal entries to correct errors or account for items like bank fees or interest.
- Verification: Ensuring the final adjusted balances match perfectly.
Why It Matters
- Error Detection: Catches double-payments, missed entries, or transposition errors (e.g., writing $54 instead of $45).
- Fraud Prevention: Helps identify unauthorized withdrawals or suspicious activity early.
- Financial Integrity: Ensures that the financial statements used by investors or tax authorities are truthful.
Pro Tip: While bank reconciliations are the most common, businesses also perform reconciliations for accounts receivable, accounts payable, and inter-company transfers to keep the entire balance sheet "clean."
