Account analysis involves an examination of the detailed line items comprising an account. Account analysis is particularly common for those accounts included in the balance sheet, since these are real accounts whose balances continue from year to year. Without proper account analysis, these accounts tend to build up amounts that should have been purged at some point in the past. If a company's external auditors locate these problems during an audit, they will require that the indicated items be written off, resulting in unexpected earnings reductions. To prevent these bulk write-downs, a best practice is to routinely examine the contents of balance sheet accounts throughout the year. Larger accounts may be reviewed every month, while smaller accounts may only be reviewed once a quarter.
Account analysis can also be conducted on the nominal accounts that comprise the income statement. However, these accounts are flushed out to retained earnings at the end of each fiscal year, so there is little opportunity for unusual items to build up in these accounts. Also, the typical outcome of such an analysis is only that a revenue or expense item has been recorded in the wrong revenue or expense account; the resulting shift of the item to a different account has no net impact on the profit or loss reported by an entity. Thus, account analysis is most profitably employed on balance sheet accounts.
A good way to conduct account analysis is to itemize the contents of an account on a single worksheet of an electronic spreadsheet, and assign the month-end date to that worksheet page. Reconcile the detail on the worksheet to the account balance. When the next account analysis is done for the same account, copy the contents of the worksheet to a new worksheet, label the page with the new month-end date, and reconcile the account again. By taking this approach, you retain a record of the contents of an account, month-by-month, for as long as you want. This is extremely useful for researching historical accounting questions, and can be used to answer questions by the auditors following the end of the fiscal year.
An additional benefit of account analysis is that the person performing the reviews may spot unusual expenditures, and bring them to the attention of management. This can result in the elimination of certain expenses, or perhaps the identification of fraud being committed against the business.
In cost accounting, the account analysis term is also used to determine the fixed and variable cost components of an account, which is useful for contribution margin analysis and the construction of flexible budgets.