What it means
Financial records go wrong in ordinary ways: a transaction is recorded twice, or once, or not at all; an amount is transposed; a payment is posted to the wrong customer; a supplier's invoice is entered for the wrong sum; a system interface fails overnight. None of these errors announces itself.
Reconciliation is how they are found. By comparing two records that should agree, prepared independently, every difference becomes a question, and answering the questions corrects the books.
The main reconciliations in most businesses are: bank (ledger cash against bank statements); receivables and payables control accounts (ledger totals against the subledgers of individual customers and suppliers); intercompany (balances between group companies, which must agree so that consolidation eliminates them); fixed assets (ledger against the asset register and, periodically, against physical existence); inventory (ledger against stock system and physical counts); payroll (ledger against the payroll system and tax filings); and balance sheet accounts generally (accruals, prepayments, provisions and suspense accounts against supporting schedules that list what the balance contains). A reconciliation is complete when the two balances agree, or every difference between them is identified, explained, and either corrected or documented as a legitimate timing difference that will clear.
"Unexplained difference" is not an acceptable line. Reconciliations should be prepared by someone other than the person who records the underlying transactions, reviewed and signed off by someone senior, and completed on a fixed schedule: bank and control accounts monthly at least, high-volume accounts weekly or daily.
Reconciliation is also the primary fraud control. Almost every fraud that runs for years leaves a difference between two records: cash taken shows up between the ledger and the bank, fictitious sales between the ledger and customer confirmations, diverted stock between the system and the shelf.
Frauds persist where reconciliations are not done, are done by the fraudster, or are forced to balance with an unexplained plug.
In practice
Real-world examples.
Example
A bookkeeper reconciles the bank account weekly, matching every ledger transaction to the statement and investigating a $340 debit that turns out to be a duplicated card payment.
Example
A group accountant reconciles intercompany balances between eight subsidiaries before consolidation, resolving $200,000 of differences caused by goods in transit at the period end.
Example
A controller reconciles the accruals account monthly to a schedule listing every accrual, its basis and its expected reversal date, and releases three accruals that have sat unchanged for a year.
Think of it
“Reconciliation is checking that two records of the same thing match-finding and fixing differences.
Formula
Calculation
Reconciled Balance = Balance per Record A, adjusted for items recorded in A but not yet in B, and errors in A
= Balance per Record B, adjusted for items recorded in B but not yet in A, and errors in B
The two adjusted balances must be equal, and every adjusting item must be identified.
Worked example, a receivables control account reconciliation. At 30 June the general ledger receivables control account shows $846,200. The sales ledger listing of individual customer balances totals $838,900. Difference: $7,300.
Investigation:
- A credit note for $2,400 was posted to the general ledger by journal but never applied to the customer's account in the sales ledger: the sales ledger is overstated. Sales ledger corrected to $836,500.
- A customer receipt of $5,600 was applied to the customer in the sales ledger but the cash book batch had not yet been posted to the general ledger: the general ledger is overstated. General ledger corrected to $840,600.
- A customer invoice of $700 was entered in the sales ledger as $7,000: the sales ledger is overstated by $6,300. Sales ledger corrected to $830,200.
- A bad debt write-off of $5,600 was processed in the sales ledger but the journal to the general ledger was never raised: the general ledger is overstated. General ledger corrected to $835,000.
- A manual invoice for $4,800 was posted to the general ledger by journal and never entered in the sales ledger, so the customer was never billed: the sales ledger is understated. Sales ledger corrected to $835,000.
Both records now agree at $835,000. Five errors were found, two in the general ledger and three in the sales ledger, and every one required a correcting entry or a missing document. The $7,000 keying error alone would have overstated sales and receivables by $6,300 and led to a customer being chased for money it did not owe, and the missing $4,800 invoice would never have been collected.Case study
Seen in the real world.
A hospitality group's suspense account, used to park unidentified receipts and payments until they could be allocated, had grown to $340,000 over five years without anyone reconciling it. When a new financial controller analysed it line by line, she found $90,000 of customer deposits for events that had taken place and should have been recognised as revenue, $60,000 of supplier payments that had been paid twice and could still be recovered, $45,000 of staff expense advances never cleared, and $145,000 of items so old that the supporting documents had been destroyed. The clean-up took two months and produced a net write-off of $110,000 and a recovery of $55,000 from suppliers.
She then set a rule that the suspense account must reconcile to a listing every month and that no item may remain in it for more than 30 days. The following year-end audit was the first in the group's history with no adjustments to balance sheet accounts.
Watch out
Common mistakes.
- Forcing a reconciliation to balance with an unexplained adjustment. The difference is the finding; a plug hides it.
- Having the person who records transactions also reconcile them. Independence is what gives the control its value.
- Reconciling only at year end. Errors and frauds found twelve months late are far harder and costlier to fix.
Questions
People also ask.
Which accounts should be reconciled?
Every balance sheet account with material activity, at least monthly, and bank and control accounts more often in high-volume businesses.
What is the difference between a reconciliation and an account analysis?
Reconciliation proves a balance against an independent record. Account analysis explains what a balance is made of. A good month-end does both.
What if a difference cannot be explained?
Escalate it. An unexplained difference that persists is either a control failure or a fraud, and either needs senior attention.
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