Account Reconcilement

What Is Account Reconcilement?

Account reconcilement is the process of confirming that two separate records of transactions in an account are equal. Both institutions and individuals perform account reconcilement. At the institutional level, banks and brokers must internally review transactions between their general ledger entries and individual account records.

Account reconcilement can help organizations pinpoint errors in accounting that could indicate mistakes, miscalculations, or cash leakage. Thanks to computer automation, this process is much faster than it once was.

Understanding Account Reconcilement

Account reconcilement within financial institutions and corporations is a key regulatory and compliance function, and it is a primary focus for outside regulators in their routine audits of a firm. For larger institutions, outside third parties are often contracted to conduct account reconcilements.

Depending on their review of the firm, auditors will issue an opinion on a company's financial statements. Customers of these firms should also keep an accurate record and report discrepancies promptly.

The Sarbanes-Oxley Act of 2002 established parameters for corporate account reconcilement. Prior to Sarbanes-Oxley, accounting standards did not account for the need to apply best practices to account reconcilement. Now, companies are held to much higher standards for internal controls and audit procedures.

With the advent of computer systems to record transactions and client positions, reconciling often amounts to fixing small discrepancies of a few dollars, or even pennies, between one source and another. The longer an error goes uncovered, the more difficult it will be to reconcile the two records.

Reconcilement also occurs when a customer of a bank or broker confirms that their personal records match what is reported on periodic statements. At the individual level, balancing a checkbook is a form of account reconcilement. The term can also refer to balancing the books and records of a business with software programs and data entries, which provides a level of objectivity to the review.

Account reconcilements allow for an immense amount of discovery, from recognizing missed payments to not receiving a refund, to being overcharged, to possible theft or fraud, and so on. Account reconcilement is a prudent practice that all individuals and businesses should perform regularly.

Account Reconcilement Process

On an organizational level, account reconcilement can be done by following a simplified process. First, all of the necessary accounting information should be collected. Then, the company’s bank statements are compared to the general ledger. Any pending deductions in the company’s ledger should be deducted from the final balance, and any pending deposits should be added to the final balance.

If the account bears interest, it should be calculated. Outstanding checks should be deducted, as should bank errors, like inaccurate debits or credits, and bank service fees. Finally, both the company statement and the general ledger should show the same final balance. Any errors that remain at the end of the process should be investigated by verifying that every transaction is posted in the general ledger and that pending deposits and outstanding checks are accounted for.

Individuals can reconcile their personal accounts using a similar process. Instead of a general ledger, they would compare their bank statements or other financial account statements to a personal record of debits and credits, such as a checkbook register. However, thanks to the advent of online banking and the decline of paper checks, many individuals no longer perform account reconcilement for most of their financial accounts and depend on their banks to show the correct final balance in online banking portals.

Still, banks can make errors, and are only transactional. To make sure monetary amounts are correct and the right funds are flowing in and out of an account, account reconcilement can provide a lot of discovery.