What it means
The word reconcilement is the older, more formal cousin of reconciliation, and in modern practice the two mean the same thing. Banks in particular still use account reconcilement to describe the service of matching issued payments against those actually presented.
Whichever word appears, the underlying discipline is identical. Reconcilement works because two parties record the same events independently.
The company records a supplier payment on the day it is authorised, while the bank records it on the day it clears; the customer records an invoice when it arrives, while the supplier records it when it is issued. Comparing the two sets of records surfaces both timing differences, which are harmless, and genuine errors, which are not.
The typical bank reconcilement adjusts each side toward a common figure. On the bank side you add deposits recorded internally but not yet credited and subtract payments issued but not yet presented; on the company side you record bank charges, interest and returned payments the business did not know about.
When both adjusted figures agree, the balance is proven. Reconcilement is not limited to bank accounts.
Businesses reconcile supplier statements against purchase ledgers, payroll totals against the general ledger, stock counts against inventory records, and merchant card settlements against sales takings. Any account where a second independent record exists is a candidate, and the ones nobody checks are exactly where problems accumulate.
Beyond accuracy, reconcilement is a control against fraud and against slow-building errors. A duplicated supplier payment, a card skimming a few dollars a week or a misposted journal will usually reveal itself first as an unexplained reconciling item.
That is why auditors treat unreconciled accounts as one of the more serious findings in a set of books.
In practice
Real-world examples.
Example
A restaurant group reconciles daily till takings against card settlements received from its payment processor. A recurring $40 daily gap turns out to be a tip pool being settled separately, and once documented the reconcilement takes minutes rather than an afternoon.
Example
A construction firm reconciles a supplier statement showing $214,000 owed against its own purchase ledger showing $198,000. Three delivery notes had never been invoiced and one credit note had been applied twice, and both issues are resolved before payment.
Example
A charity reconciles its payroll control account each month after a previous year-end when unpaid employer contributions had accumulated unnoticed. The monthly discipline catches a misapplied pension rate in its second month rather than eleven months later.
Formula
Calculation
Adjusted bank balance = Statement balance + Deposits in transit - Outstanding payments. Adjusted book balance = Ledger balance - Unrecorded charges - Returned items. The reconcilement succeeds when the two adjusted figures are equal.
A company's bank statement at 31 May shows $52,400. Two customer deposits totalling $9,800 were banked on 31 May but not credited until 1 June, and cheques worth $14,600 issued in May had not been presented by the month end. Adjusted bank balance = $52,400 + $9,800 - $14,600 = $47,600. The company's own ledger shows $48,350, but it had not yet recorded $150 of bank charges or a $600 customer payment returned unpaid. Adjusted book balance = $48,350 - $150 - $600 = $47,600. The two adjusted figures agree at $47,600, so the account is reconciled and the $750 of adjustments are posted to the ledger.Case study
Seen in the real world.
Calderhurst Joinery is an illustrative cabinetmaking business used here to show what happens when reconcilement lapses. During a busy eighteen months the bookkeeper stopped reconciling the main bank account, reasoning that the software imported transactions automatically and therefore had to be right. The bank balance in the accounts drifted steadily above the real one.
When a new accountant reconciled the account, the difference came to just over $31,000. Most of it was innocent: duplicated imports where a bank feed had been reconnected, and several supplier payments recorded twice. Around $4,000, however, was a genuine loss from a subscription that had been cancelled by phone but continued to be charged for fourteen months.
In this fictional example the business recovered part of the subscription charges and wrote off the rest. The more valuable outcome was procedural, since a monthly reconcilement signed off by someone other than the person entering transactions became a standing requirement.
Watch out
Common mistakes.
- Treating an automatic bank feed as a reconcilement. A feed imports transactions but does not prove that the closing balance in the books equals the balance the bank holds.
- Forcing a reconcilement to balance with a plug entry to a suspense or sundry account, which hides the underlying problem instead of solving it.
- Reconciling only the bank account and leaving supplier statements, payroll control and stock records unchecked for months at a time.
Questions
People also ask.
How often should accounts be reconciled?
Bank and card accounts are usually reconciled monthly at minimum and weekly in cash-heavy businesses, with control accounts reconciled at each month-end.
What is a reconciling item?
It is any difference between the two records that has an identified explanation, such as a payment issued but not yet presented to the bank.
Should the same person record transactions and reconcile the account?
Ideally not, because separating the two roles is one of the simplest and most effective controls a small business can put in place.
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