Account Reconciliation Meaning, Purpose and Types

Quick Answer: Account reconciliation means proving that the balance of an account in your books agrees with an independent record of the same thing, such as a bank statement, a vendor statement or a loan schedule, and explaining every difference. Its purpose is to catch errors, omissions and fraud before they reach your financial statements or tax return.

To reconcile an account is to line up two records that should tell the same story and show, in writing, why they agree or exactly where they differ. One record is your general ledger. The other comes from outside it: a bank, a supplier, a customer, a lender or a subsidiary. The finished reconciliation is the evidence that the ledger balance is real.

What does "reconcile" actually mean in accounting?

The word comes from the idea of bringing two parties back into agreement. In bookkeeping the two parties are documents. Your ledger says the operating account holds $18,240.55 on March 31. The bank says $19,105.10. Those numbers are not wrong just because they differ; checks you mailed on March 30 have not cleared, and a deposit you made on the 31st will not post until April. Reconciling is the work of listing those timing items, adding them to or subtracting them from one side, and arriving at the same adjusted figure on both.

Three ideas sit inside every reconciliation, whatever the account:

• A source of truth outside the ledger. You cannot reconcile the books to themselves. The comparison only means something when the second record was produced by someone else or by a separate process.
• A cutoff date. Both balances are taken at the same moment, usually the last day of a month or a statement period.
• An explained difference. The goal is not a zero difference at any cost. It is a difference you can itemize, where each item is either a timing difference that will clear on its own or an error you correct with an entry.

If you finish with an unexplained "plug" to force the totals together, you have not reconciled anything. You have hidden the problem.

What is the purpose of account reconciliation?

People ask this in several forms, and the honest answer has four parts.

1. Accuracy of reported numbers. The balance sheet is a list of account balances. If cash, receivables or loans are wrong, the balance sheet is wrong, and because errors usually have a second side in an income or expense account, profit is wrong too.
2. Completeness. Reconciling a bank account is how most small businesses find transactions nobody recorded: an automatic insurance draft, a card fee, a customer's direct deposit.
3. Fraud detection. An unexpected withdrawal, a duplicated vendor payment or a check made out to an unfamiliar payee shows up as an unmatched line. Regular reconciliation by someone other than the person who writes checks is one of the oldest internal controls there is.
4. Support for taxes and audits. The IRS expects you to keep records that back up the income and deductions on your return; its recordkeeping guidance for small businesses says to keep records as long as they are needed to prove what you reported. A monthly reconciliation file, with statements attached, is that proof in an organized form.

There is a quieter fifth purpose: decision-making. A business owner who checks the cash balance in the accounting software and sees a figure that has not been reconciled in four months is planning payroll on a guess.

What are the common types of account reconciliation?

"Account reconciliation" is the umbrella. Underneath it are specific comparisons, each with its own outside document.

Bank reconciliation is the type most people meet first, and it has its own guide: what bank reconciliation is walks through the cash case alone. The rest of this article stays at the umbrella level.

Subledger to control account

One more comparison sits underneath several of the rows above. Accounts receivable in the general ledger is a single number, but it should equal the sum of every customer's open balance in the receivables subledger. The same goes for payables and, in some systems, inventory. When the control account and the subledger total drift apart, someone posted directly to the control account with a journal entry. That is worth finding before you compare anything to an outside statement.

What does a finished reconciliation prove?

A completed, reviewed reconciliation tells a reader four things:

• The ledger balance on the cutoff date is supported by a named outside document.
• Every difference between the two is listed with a date, an amount and a reason.
• The timing items are genuine, meaning they cleared in the following period. Last month's outstanding checks should appear on this month's statement.
• Any corrections were posted as entries, so the ledger itself now holds the right number.

It does not prove that every transaction was categorized to the right expense account. A bank reconciliation can balance perfectly while a $2,000 equipment purchase sits in office supplies. Reconciliation checks the balance of one account against outside evidence; classification needs a separate review of the income statement.

It also does not prove the outside document is correct. Banks rarely err, but vendor statements often do, and a customer confirmation is only as good as the customer's own records.

How often should accounts be reconciled?

Monthly is the norm for cash and credit cards because statements arrive monthly and because the longer you wait, the harder a difference becomes to trace. Accounting software supports that rhythm; Intuit's instructions for reconciling in QuickBooks Online start from the statement's ending balance and ending date and finish when the difference reaches zero.

Other accounts can follow the materiality of the balance. A business with heavy receivables reconciles AR monthly; one with a single equipment loan may tie out the loan quarterly against the lender's statement and once more at year end. Regulated accounts are the exception: client trust accounts held by attorneys have reconciliation schedules set by state rules, covered in the guide to trust account reconciliation.

What do you need before you can reconcile?

The comparison is only as fast as the documents are easy to read. For each account you need:

• the outside statement for the period, with its opening and closing balance;
• the ledger detail for the same account and dates;
• last period's reconciliation, so you know which items were already outstanding.

Bank and card statements usually arrive as PDFs, which is where reconciliation slows down for many bookkeepers. You can download a CSV from online banking for recent months, and that is the simplest option when it exists. For older statements, or banks that only offer PDFs, a converter such as QuickBankConvert turns the statement into spreadsheet rows with the opening and closing balance shown above the preview, so you can sort, filter and tick items against the ledger. The step-by-step account reconciliation procedure covers what to do once the data is side by side.

Who should do the reconciliation?

In a small business the owner often does everything, but if you have even one employee, separate the duties. The person who writes checks or approves payments should not be the only person who reconciles the bank account. If that is impossible, the owner should at least review and initial each month's completed reconciliation and look at the actual statement, not just the summary.

In larger companies, reconciliations are prepared by staff accountants and reviewed by a controller, and the review is documented with a date and signature. Auditors test that trail.

Reconciliation versus related terms

• Reconciliation vs. review: a review reads balances for reasonableness; a reconciliation ties them to outside evidence line by line.
• Reconciliation vs. matching: matching pairs individual transactions (this deposit is that invoice payment). Reconciliation uses matching as a step, then proves the balances.
• Reconciliation vs. adjustment: the reconciliation finds the problem; the adjusting entry fixes it in the ledger.

For the balance-sheet-wide version of this work, see how to reconcile a balance sheet.

Related guides

• Bank reconciliation, defined for the cash account
• Reconciling a general ledger account step by step
• Account-by-account balance sheet reconciliation
• Turning PDF statements into spreadsheets