Account reconciliation definition

What is an Account Reconciliation?

An account reconciliation is the actions taken to prove that an account balance is valid. The concept is most commonly associated with the bank reconciliation, where a company’s recorded cash balance is compared to the bank’s end-of-month bank statement and adjusted as necessary to make the two balances match. It is also a key task to be completed before an organization’s books are audited at the end of each year.

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Advantages of Account Reconciliations

Account reconciliations should be conducted regularly, to ensure that the account balances appearing in a firm’s balance sheet are correct. If not, a common outcome is for many asset accounts to be overstated, requiring a business to charge off significant amounts at year-end to more accurately align these accounts with reality.

An account reconciliation is especially important for bank accounts, since one might incorrectly assume that a cash balance is higher than is really the case. When this situation arises, companies are more likely to issue check payments and then find that they have overdrawn their accounts, resulting in either overdraft fees or bounced checks.

Account reconciliations are also useful for spotting instances of inappropriate purchases. Once identified, management can implement controls to minimize the risk that these expenditures will be made again.

Examples of Reconciling an Account

A company controller wants to reconcile all balance sheet accounts at the end of the year, so that their ending balances can be justified to the auditors. This involves collecting documentary evidence concerning the amounts stated in each account. For example, she matches the total in the payables detail report to the ending balance in the trade payables account; this means that she can give a copy of the payables report to the auditors as proof that the ending balance in the trade payables account is correct.

As another example, the controller maintains a list of the prepaid expenditures recorded in the prepaid expenses asset account, and adjusts this list at the end of each month for any additions to the account, as well as deductions for items in the account that have been charged to expense.