Reconciliation Accounting: Types, Procedures, And Examples

July 1, 2023

reconciliation accounting

Have you heard about verifying a company’s financial records and reconciling them with external sources? That’s what reconciliation accounting is all about. The purpose of conducting it is to ensure financial data consistency as well as preciseness, which is integral for making informed decisions. But what’s so intriguing about it?

The process of account reconciliation is a general practice that businesses optimize for creating a balance sheet of their expenses. This is done annually at the end of the financial year. But you need to record your economic transactions all around the year in your general ledger. So as to avoid any mistakes when putting the figures together. 

Types Of Reconciliation Of Accounts

Reconciliation in accounting comes in a lot of forms, and they can be either personal or professional. Given below are 5 major types of them: 

1. Bank Reconciliation

Bank Reconciliation

It refers to the most popular type of reconciliation. A bank reconciliation simply compares transactions tracked in the internal ledgers to your monthly bank statements. A number of these transactions, like earnings and payments, are then tracked by the bank. Thus, reconciling accounts helps spot discrepancies in issued checks or a transaction that goes missing. 

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2. Business-Based Reconciliation

Business-Based Reconciliation

When dealing with a business-based reconciliation, you must compare your brand’s internal records from the start of a financial year to its end. The aim is to find products or services sold and match them with your internal reports.  Among other forms of reconciliation accounting, this is a significant one. 

3. Vendor Reconciliation

Vendor Reconciliation

The third type is vendor reconciliation. Here you need to reconcile the payable records of your account with the statements offered by suppliers and vendors. The aim is to ensure that the amount paid to you matches the vendor’s received amount. Vendors, unlike bank statements, usually don’t send their reports. So, ensure to request them for the same. 

4. Intercompany Reconciliation

Intercompany Reconciliation

Parent companies mostly use the intercompany form of reconciliation to unify the entire ledger and accounts recorded in their subsidiary. In an intercompany account reconciliation, you are designated to check the mismatches between two subsidiaries. This ensures that all your records precisely denote the firm’s financial status. 

5. Consumer Reconciliation

Consumer Reconciliation

Last but not least is consumer reconciliation which is usually performed by businesses. Here, a comparison is drawn between the ledger records and the invoices received by the consumers. The process is equally significant for companies as it provides credit terms as well as consumer options. 

Reconciliation Of Accounts: Procedures Adjoined

You might be wrong if you think that reconciliation in finance is just a two-step process. It actually consists of a lot of thorough practices, some of which are mentioned below:

Step 1: Gather Relevant Reports

Gather Relevant Reports

First things first, you will have to gather all your records, ledgers, invoices, and other data necessary for account reconciliation. This includes purchases, expenses, earnings, and payments occurring each month.  Check out the places where they are recorded and collect them all together. 

Step 2: Statement Comparison

Statement Comparison

Step number two begins with comparing your statements to your company’s external ones. Take note of the records you are missing out on since it helps perform a side-by-side comparison of all your records with theirs. For instance, you might analyze each transaction recorded in the financial statement and cater to them later. 

In order to simplify things, start by focusing on your account debits. Reconciliation accounting ensures you check all outgoing fund transactions recorded in the internal ledger. Complete the same process when dealing with credits. 

Step 3: Inspect The Discrepancies

Inspect The Discrepancies

If you are not doing this already, look for missing records. Even after repeating the first and second steps, you find discrepancies; it’s time to take things seriously. Investigate and review all transactions with mismatches and consult the designated department to check why the records aren’t matching. 

On conducting a thorough internal investigation, there might be other reasons involved. Talk to the bank and vendor to ensure that there are no errors. Usually, banks do not make such mistakes in their bank statements. Hence, you must exhaust all your reviewing methods before opting for this step. 

Examples Of Account Reconciliation 

After studying the reconciliation types, it’s time to show you some real-time examples for a better understanding. Make sure you go through each of them to have a comprehensive idea of how account reconciliation works. 

1. Bank Account And Ledger’s Cash Balance

Bank Account And Ledger’s Cash Balance

The cash balance in the bank accounts might not match those in the book of accounts. This can be possible for various causes such as bounced payments, missed entries, incurred charges, and interest accrued. 

2. Accounts Payable

Accounts Payable

In reconciliation accounting, accounts payable refer to the money owed by a company to its vendors and suppliers. The delivery, as well as manufacturing of goods, depends on simple account payables. Thus, it is critical to reconcile the accounts payable balance owing to disputes, short payments, and early discounts. 

3. Advance Payment Expenses

Advance Payment Expenses

Businesses usually pay certain expenses in advance, particularly if they are regular. But, account reconciliation is important for ensuring that products and services are received and delivered according to the contract. During this situation, reconciliation helps in evaluating the expense and checks whether it should be continued. 

4. Receivable Accounts

Receivable Accounts

Receivable accounts refer to the amount that your company’s consumers owe you for your offerings. Here, you might need to prioritize reconciling account receivables just to ensure jovial customer relations and steady cash flow. You might also need to inspect the ledger and bank balances to ensure no short payments, disputes, or even deductions. 

Read More: What Is Total Revenue Formula? – Definition, How To Calculate, And More

The Bottom Line

Organizing and streamlining your data helps you to conduct a precise account reconciliation. It becomes easier to compare accounts as well as spot errors wherever required. When it comes to reconciling your accounts, you might seek help from professionals or agencies. 
So, this was all about reconciliation accounting! We hope you liked this article and found it to your use. Let us know your thoughts about it in the comment section below. Thank you for reading!

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Mony Shah

With an adept skill of curating content on multiple genres, Mony has harnessed success as a Content Writer quickly. Find her sharing profound thoughts and opinions on finance, insurance and lifestyle niches.

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