In order to guarantee that transactions are accurately recorded at month’s end for financial statements and that adequate internal control is in place, accountants and bookkeepers use the general ledger account reconciliation process for balance sheet accounts.

What is Account Reconciliation?

The process of account reconciliation involves comparing general ledger accounts for the balance sheet with supporting records including bank statements, sub-ledgers, and other underlying transaction information. When the final balances differ, accountants look into the reason why and create the adjusting entries necessary to make up for errors or missing transactions.

When is Account Reconciliation Done?

Account reconciliation is performed by accountants either in real-time utilizing specialist automation reconciliation software coupled with an ERP or during each monthly and annual financial close procedure. The software for automated reconciliation has a useful audit trail.

Types of Reconciliation:-

Types of balance sheet reconciliations include:

1. Cash accounts using bank statement reconciliations
2. Cash equivalents
3. Accounts receivable
4. Inventory
5. Fixed assets and accumulated depreciation
6. Prepaid assets
7. Intangible assets and amortization
8. Accounts payable
9. Accrued liabilities
10. Income tax liabilities
11. Notes payable (short-term and long-term components)
12. Retained earnings
13. Capital accounts

1. Cash accounts bank statement reconciliations:-

Cash account reconciliation compares the cash account balances in the general ledger to the bank statement balances for each bank account.

A bank reconciliation addresses errors and timing differences resulting from outstanding checks or ACH transactions that have not yet been cleared or recorded, deposits in transit that have not yet been recorded by the bank or in the general ledger, and bank service fees or other items such as overdraft fees that have not yet been recorded.

2. Cash equivalents:-

Using brokerage and investment company statements or financial institution statements, reconcile general ledger accounts to balances of short-term investments with maturities of 90 days or less. Treasury bills, commercial paper, money market accounts, marketable securities, and short-term government bonds are examples of cash equivalents.

3. Accounts receivable:-

Customer invoices and credits may not match the general ledger if they are accrued and not entered separately into the aged accounts receivable journal. Customer account write-offs must be recorded against the Allowance for Doubtful Accounts, which in financial statements nets against Accounts Receivable.

4. Inventory:-

Inventory (and related accounts payable) transactions may lag, necessitating accruals through a cut-off date after the end of the month. Annual physical inventories are performed, as are more regular cycle counts of fewer goods. Physical inventory counts must be reconciled with the general ledger, and any disparities must be documented with journal entries.

In the inventory recording and reconciliation processes, reconciling items to consider include the allowance for obsolescence and inventory valuation at the lower of cost or market.

5. Fixed assets and accumulated depreciation:-

Fixed assets should be rolled forward by properly recording purchases, sales, retirements and disposals, and accumulated depreciation. Fixed assets have a debit balance in financial records such as the general ledger and trial balance, while accumulated depreciation has a credit balance to counterbalance fixed assets.

6. Prepaid assets:-

To verify the general ledger account for each type of prepaid asset, check the balances of prepaid assets for the beginning balance plus any transaction additions minus time passage reductions to equal the ending balance.

Prepaid assets are prepaid expenses that are capitalized as an asset when paid in cash. Prepaids are recognized gradually as an expense, using a monthly allocation with a journal entry to reduce the prepaid asset balance and record the expense on the income statement.

For prepaid insurance, for example, a schedule with a beginning balance, the cost of new insurance policies or renewals received minus amounts amortised for time usage results in a new ending balance. The schedule’s closing balance should match the general ledger balance. Another example of prepaid assets that are amortised over twelve months as each month passes is annual SaaS subscriptions.

7. Intangible assets and amortization:-

Intangible assets include goodwill and brand value derived from mergers and acquisitions, intellectual property (patents, copyrights, and trademarks), licences, R&D, and customer lists. Intangible assets, such as patents, are amortised over time and decreased for asset impairments when appropriate, based on a periodic study and appraisal. Spreadsheets or a template from accounting software can be used.

8. Accounts payable:-

Accountants compare the main ledger balance for accounts payable to subsidiary journals. Accrual accounting is required by GAAP (generally accepted accounting standards) to report accounts payable and other liabilities in the correct accounting period.

Credit card statement account balances must be reconciled to the appropriate payables account in the general ledger.

When batch payment runs are finished using AP automation and global mass payments software, real-time automatic payment reconciliation reports are generated to reconcile with the general ledger. Your ERP system is integrated by the automation software.

9. Accrued liabilities:-

List general ledger accounts by name and amount included in accumulated liabilities on a spreadsheet. Wages and benefits, payroll taxes, contingent liabilities, and other accumulated liabilities are examples of accrued liabilities.

Consolidate the beginning balance, list and add new transactions, list and deduct payments or other reductions, and determine the period’s final balance. This activity schedule should support the general ledger closing balance for each account.

10. Income tax liabilities:-

Make a schedule to assess your income tax liabilities. Compare income tax liabilities to the general ledger account and adjust for any discernible variances that require journal entry recording.

11. Notes payable (short-term and long-term components):-

A separate spreadsheet should be created for short-term and long-term notes payable.

Each account’s starting balance should be provided. Add new notes payable transactions. Adjust the categories as needed based on a computation of short-term notes payable liabilities for the next 12 months to accurately designate amounts in the categories as short-term or long-term. Determine the final balances.

In comparison, consider the general ledger. Make any necessary adjustments to general ledger balances to properly reflect short-term and long-term notes payable components.

12. Retained earnings:-

A retained earnings statement includes the beginning balance + net income (or loss) minus cash dividends Equals ending retained earnings balance. Verify the amounts by tracing the net income or loss to the income statement and the cash dividend issuing. Compare the general ledger ending balance to the period’s retained earnings calculation.

13. Capital accounts:-

Analyze capital accounts by transaction using a schedule of general ledger accounts for any additions or subtractions. The spreadsheet should include the beginning balance, additions, subtractions, and any changes needed for recording in order for the capital account ending balances to match the general ledger ending balances.

Capital accounting activity covers transactions involving the par value of common stock, paid-in capital, and treasury shares.

Steps in Account Reconciliation

Steps in bank account reconciliation are:-

• Enter the ending cash balance per the bank statement
• Subtract outstanding checks (not yet cleared)
• Add deposits in transit (not yet deposited)
• Add bank service fees and other bank transactions not yet recorded
• Enter the ending cash balance per the general ledger
• Calculate the difference between the cash balance per the bank statement and general ledger account
• Investigate the sources of differences and add or subtract them by type
• Inform the bank of any bank errors
• Record any general ledger entries required

Balance sheet accounts reconciliation steps are:-

• Compare the trial balance with the general ledger account.
• Correct any differences between the trial balance and general ledger
• Compare the general ledger account with the detailed subsidiary ledger
• Investigate discrepancies to determine the source
• For each difference identified, decide whether it should be recorded in the subsidiary ledger or the general ledger via adjusting journal entry (if an entry is required)
• Compare again to ensure that the general ledger and subsidiary ledger balances are the same for the month-end close.