Accountants and bookkeepers can make sure that transactions are accurately documented at month’s end for financial statements and that adequate internal control is in place by using the general ledger account reconciliation method 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:-

The general ledger balances for the cash accounts are compared to the bank statement balances for each bank account throughout the cash account reconciliation process.

Bank reconciliation addresses inaccuracies and timing discrepancies resulting from unrecorded deposits in transit, unrecorded bank service fees, unrecorded other things including overdraft fees, and uncleared or unrecorded cheques or ACH transactions.

2. Cash equivalents:-

Using brokerage and investment company statements or financial institutions statements, match the balances of short-term investments with a maturity of 90 days or less to the general ledger accounts. Treasury bills, commercial paper, money market accounts, marketable securities, and short-term government bonds are all examples of things that are comparable to cash.

3. Accounts receivable:-

If customer invoices and credits are accrued rather than individually entered into the aged accounts receivable journal, the specifics of the accounts receivable may not match those in the general ledger. Write-offs for customer accounts 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 take longer to record, necessitating accruals through a deadline that is after the month’s end. Annual physical inventories and more frequent cycle counts of fewer items are used. The general ledger and physical inventory counts must be compared, and any inconsistencies that cannot be addressed must be recorded using journal entries.

In the inventory recording and reconciliation operations, reconciling items to take into account include the allowance for obsolescence and the inventory valuation at the lower of cost or market.

5. Fixed assets and accumulated depreciation:-

Rolling forward fixed assets requires accurate recording of all purchases, sales, retirements, disposals, and cumulative depreciation. Fixed assets have a debit balance in financial records like the general ledger and trial balance, while accumulated depreciation has a credit balance to balance fixed asset.

6. Prepaid assets:-

Check the balances of prepaid assets for the initial balance plus any transaction additions minus time passage reductions to equal the ending balance in order to confirm the general ledger account for each type of prepaid asset.

Prepaid expenses are ones that are paid in cash and capitalized as assets. The cost of prepaid is gradually recognized as an expense, with the expense being recorded on the income statement and the prepaid asset balance being reduced through a monthly allocation and journal entry.

The new ending balance for prepaid insurance is created, for instance, using a schedule with a beginning balance, the cost of new insurance policies or renewals received, minus sums amortized for time usage. The general ledger balance and the ending balance in the schedule should match. Another example of prepaid assets amortised over a twelve-month period is annual SaaS subscriptions.

7.Intangible assets and amortization:-

Goodwill and brand value from mergers and acquisitions, intellectual property (patents, copyrights, and trademarks), licenses, R&D, and customer lists are examples of intangible asset types. Intangible assets, such as patents, are amortised over time and, if necessary, lowered for asset impairments based on a periodic study and appraisal. You can use spreadsheets or an accounting software template.

8. Accounts payable:-

Accountants contrast the accounts payable balance in the general ledger with the supporting subsidiary journals. Accounts payable and other obligations must be recorded using accrual accounting in accordance with GAAP (generally accepted accounting standards).

Credit card statement account balances must be compared to the relevant payables account in the general ledger.

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

9. Accrued liabilities:-

List all accounts in the general ledger together with the accrued liability amount in a spreadsheet. Wages and benefits accrued, payroll taxes owed, contingent obligations, and other accrued liabilities are all examples of accrued liabilities.

Confirm the beginning balance, add any new transactions, list and deduct payments or other reductions, and then calculate the period’s closing balance. The general ledger closing balance for each account should be supported by the activity schedule.

10. Income tax liabilities

Make a schedule and examine your income tax obligations. Check the general ledger account for income tax liabilities against it and make any necessary corrections for any discernible discrepancies that require a journal entry.

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

Both short-term and long-term notes payable should have sections on an underlying spreadsheet.

List each account’s initial balance. Add new notes payable transactions. To accurately designate sums in the categories as short-term or long-term, make any necessary changes between them based on a computation of short-term notes payable liabilities for the upcoming 12 months. Determine closing balances.

In contrast to the general ledger Make any necessary adjusting journal entries to the general ledger balances to reflect the short- and long-term note payable components as necessary.

12. Retained earnings:-

Beginning balance plus net income (or loss) minus cash dividends equals the ending retained earnings balance in a statement of retained earnings. Verify the amounts by following the net profit or loss to the income statement and the cash dividend distribution. Contrast the calculation of retained earnings for the period with the general ledger’s closing balance.

13. Capital accounts:-

Analyze capital accounts for any additions or deletions using a schedule of general ledger accounts. The spreadsheet should include the starting balance, any additions or subtractions, and any recording modifications necessary to make the capital account ending balances correspond with the general ledger ending balances.

Transactions involving paid-in capital, treasury shares, and common stock par value are all included in capital accounts activity.

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