How do I reconcile an account?

When you reconcile an account, you are proving that the transactions comprising the account balance are correct. Auditors want to see an account reconciliation for larger accounts, though you should perform reconciliations yourself even in the absence of an auditor request, since this is a good accounting practice.

An account reconciliation is usually done for asset, liability, and equity accounts, since their account balances may continue on for many years. It is less common to reconcile a revenue or expense account, though this may be done simply to verify that transactions were recorded in the correct account; a reconciliation may reveal that you should shift a transaction into a different account.

There are two ways to reconcile an account, which are:

• Documentation review. A documentation review is the most common form of account reconciliation, and the one that auditors prefer. Under this method, you call up the account detail in your accounting software, and review the appropriateness of each transaction listed in the account. For example, if you are reconciling your trade accounts receivable account, the balance in the account should exactly match the total of your open accounts receivable report.
• Analytics review. Under an analytics review, you create an estimate of what should be in the account, based on historical activity levels or some other metric. For example, you may estimate the amount of expected bad debts in your open accounts receivable, and see if this approximately matches the balance in your allowance for doubtful accounts contra account.

If your account reconciliation reveals that an account balance is not correct, then you should adjust the account balance to match your supporting detail. By doing so, you can always justify your account balances. Also, always retain your reconciliation detail for each account, not only as proof, but also so that you can use it as a starting point for account reconciliations in later periods.

Related Topics

What is a reconciliation statement?
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What is an account?
What is the normal balance for an account?