Account reconciliation: what it is, why it’s important and how to do it  

If you’re a business owner, there’s much to track, including whether you’re adhering to the latest compliance guidelines and ensuring your financial records are accurate.  

Making sure your financial records are accurate can be time-consuming, but account reconciliation can help. 

This article explores account reconciliation, why all businesses should use it, and the different types to consider. 

What is account reconciliation? 

Account reconciliation is the vital process of ensuring accurate financial records by comparing two sets of financial information to ensure they match. 

So, for example, you would compare your business's financial records, such as cash account records, with data from a third party, such as bank statements.  

By performing account reconciliation, you’re essentially reviewing financial information from several sources to ensure its accuracy. The process can also help identify and resolve potential discrepancies.  

There is a range of documents that can undergo account reconciliation, including receipts, transaction statements and invoices.  

Why should a business do account reconciliation? 

All businesses should perform account reconciliation as it can: 

• Identify discrepancies between two sets of financial records. 
• Flag errors that need to be corrected. 
• Highlight fraudulent activity. 
• Identify discrepancies linked to outstanding bank transactions, cheques and fees. 
• Ensure any financial statements and records are accurate. 
• Ensure compliance with financial regulations. 
• Assist with future tax returns. 

If you notice any errors or discrepancies, you should find out the cause and resolve them as soon as possible or contact a third party if the error is in their data or records. 

Inaccurate records mean your business doesn’t have a clear picture of its financial health, which can impact current and future growth.  

Account reconciliation can also indicate fraudulent activity, whether it’s through unauthorised financial activity such as using the company credit card without permission or edited invoices.  

When is account reconciliation done? 

Businesses should regularly perform account reconciliation. 

The end of an accounting period, such as the end of each month, is a good time to do account reconciliation as you can have a clear image of monthly transactions.  

Who is responsible for account reconciliation? 

Account reconciliation is usually performed by financial professionals such as accountants, bookkeepers or finance officers.  

With smaller businesses, it might be the responsibility of the owner or multiple people if the company is larger. If external help is needed, you could hire a qualified accountant that's local to you.

What are the different types of account reconciliation? 

There are various types of account reconciliation to consider, including: 

• Bank reconciliation: This is where you compare your company’s transactions in your statements with those from your bank. 
• Accounts payable reconciliation: You compare accounts payable balances with payment records and third-party invoices. 
• Accounts receivable reconciliation: You check the company’s accounts receivable records with payment receipts and customer invoices.  
• Inventory reconciliation: This is where you compare your actual inventory with recorded inventory data. 
• Ledger reconciliation: You compare the company’s overall financial transactions with the relevant third-party documentation. 
• Tax reconciliation: This is when you compare the amount paid in tax with relevant financial records to make sure you’ve paid the correct amount of tax. If you’ve used any allowances or reliefs to reduce your tax bill, this is also worth checking.  
• Credit and debit card reconciliation: You verify that credit and debit card transactions match the relevant statements.  
• Fixed assets reconciliation: You check any records of fixed assets with documentation such as invoices, disposal and depreciation records. 

Other types of account reconciliation that may not apply to all businesses include comparing digital wallet transactions, foreign currency transactions, and real-time payment reconciliation processes with relevant financial records.  

If your company has any subsidiaries or divisions, it’s worth checking transactions and financial records between them.  

While all of these types of account reconciliation are used to ensure accurate financial records, some are more useful in highlighting illegal activity. For example, inventory reconciliation can flag any theft. 

What are the key methods for performing account reconciliation? 

There are two main ways to do an account reconciliation. 

The first is to review your business's financial records and compare them with original documents, including invoices, receipts, and statements. 

Another way to perform an account reconciliation is by conducting a historical analysis of financial data and comparing it to the latest information. 

This method can highlight how a company’s current finances compare to those made from historical data, as significant differences can flag irregularities. 

What are the steps involved in account reconciliation? 

Account reconciliation focuses on ensuring your financial records are accurate and error-free, so having a process to follow is vital. 

Here are some key steps to follow when undergoing account reconciliation: 

• Establish the start and end point: As account reconciliation is usually done every month, you should ensure the balances at the beginning and end of the month match.
• Find the necessary records: Next, gather the documents, such as bank statements, invoices, and the company ledger, for the period you want to check.  
• Complete the analysis: You must now compare the company’s data with those from third-party sources and original documents. Does everything match?   
• Investigate any discrepancies: Sometimes, discrepancies can be due to human error but can also point to more serious issues, such as fraud. It’s good to explore why the discrepancy has happened, as it could be linked to outstanding cheques or other factors.  
• Correct or flag any discrepancies: You must adjust your records if there’s a discrepancy after identifying any errors or noting anything temporarily impacting the records. If the error is with a third party, you must contact them to correct it. 

Why might there be discrepancies during account reconciliation? 

If you notice any discrepancies, many factors could be behind them, which we’ll now discuss. 

Errors 

Any mistakes can result in discrepancies between your company’s financial records and third-party data.  

For example, if the company’s balance and the bank balance don’t match, this could be due to incorrectly recording fees or interest.  

This should be recorded in the reconciliation and noted in the records, which should be updated.  

Missing transactions 

Discrepancies can happen when transactions are not properly recorded. 

So, for example, if you spend money with a company credit card but forget to declare it in the general ledger, this could lead to inaccuracies between credit/debit card reconciliation and bank reconciliation. 

Again, this should be recorded and noted in the records, which should be updated.  

The timing of transactions

You may find differences between the company’s cash balance and the bank balance. 

One reason for this could be that the company has written a cheque that is recorded in its financial records but hasn’t yet been cleared by the bank. 

So, in this scenario, it may appear the company has more money than recorded in the general ledger when this is not the case.  A note of any discrepancies should be made during the reconciliation.  

Can you use software for account reconciliation? 

Yes, you can use software for account reconciliation, whether it’s to automate certain processes or to offer assistance.  

Some account reconciliation software lets you connect your bank account, import and match transactions, and complete an automatic reconciling process. 

If you already have accountancy software, it’s worth checking if you can get compatible account reconciliation software.  

While account reconciliation software can save you time, an accountant should double-check everything to ensure accuracy.  

Need help with your financial records? 

Handling your company’s financial records can be daunting and time-consuming, but it doesn’t have to be. 

Unbiased can connect you with a qualified accountant who can make sure your financial records are accurate and up to date.