Account Reconciliation

Account reconciliation is the accounting control of proving that the balance of each account in an organisation's general ledger is correct, by comparing it with independent evidence and explaining every difference. The evidence can be a bank statement, a subledger total, a loan statement from a lender, a fixed-asset register or a schedule of prepaid costs. Finance teams carry out account reconciliations as part of the month-end close, before the books are used to prepare financial statements.

Because it is usually done for every account on the balance sheet, the practice is also called balance sheet reconciliation. It is the accounting branch of the wider idea of reconciliation; bank reconciliation and intercompany reconciliation are two of its best-known types. External auditors test these reconciliations, and in US-listed companies they form part of the internal control over financial reporting that management must assess under the Sarbanes-Oxley Act of 2002.

Think of a household that keeps a list of everything it owes and owns. At the end of each month someone checks each line against a real document: the car loan against the lender's letter, the savings figure against the bank app, the money lent to a cousin against a note the cousin signed. If the list says one thing and the document says another, they find out why before trusting the list.

A company does the same, only with hundreds of accounts. Each account gets an owner, a supporting document and a short write-up. The write-up shows the ledger figure, the outside figure and a list of reasons for any gap, such as a payment still in the post. Anything that cannot be explained is chased until it is fixed.

A standard reconciliation follows the same steps for any account:

1. Take the closing balance of the account from the ledger after the period's postings, as shown on the trial balance.
2. Obtain the supporting balance from an independent source: a statement, a subledger report, a count or a calculation schedule.
3. List reconciling items: timing differences that will clear on their own, and errors that need a correcting journal entry.
4. Post the corrections, attach the evidence, and have a second person review and sign off.

The test is simple:

• $\text{Ledger balance}$ is the account's closing balance in the general ledger.
• $\text{Supporting balance}$ is the figure from the independent evidence.
• $\text{Reconciling items}$ are the identified, documented differences (positive or negative).

Worked example: an accrued-expenses account shows 50,000 in the ledger. The schedule of unpaid supplier invoices totals 47,000. A 2,500 utility accrual is missing from the schedule but supported by a meter reading, so it is a valid reconciling item. That leaves 50,000 − 47,000 − 2,500 = 500 unexplained, which must be investigated before sign-off.

• Cash accounts. Each bank account is matched to the bank's statement, and physical cash is counted; see cash reconciliation.
• Control accounts. The accounts receivable and accounts payable totals in the ledger are agreed to the customer and supplier subledgers.
• Accruals, prepayments and deferrals. Balances created by accrual accounting, such as deferred revenue, are agreed to schedules that show how they were calculated.
• Intercompany accounts. Amounts owed between group companies are agreed with the other entity before consolidation.
• Clearing and suspense accounts. Temporary holding accounts, such as a clearing account for card receipts, should net to zero or to a known list of open items.

Many companies rank accounts by risk. High-risk accounts (cash, revenue-related balances, accounts with many manual entries or large judgement) are reconciled monthly with full review; low-risk, stable accounts may be reconciled quarterly. A materiality threshold sets how large an unexplained difference may be before it must be resolved rather than noted.

Segregation of duties matters: the preparer should not be the person who posts most entries to the account, and the reviewer should be senior to the preparer. Stale reconciling items are a known warning sign. A balance that has been "explained" by the same item for six months often hides an error or fraud, and auditors look for exactly this. The COSO internal control framework, which most US public companies use for Sarbanes-Oxley Section 404 assessments, treats reconciliations as a standard control activity. Weak reconciliation is a frequent root cause of restatements and of operational risk losses in financial firms.

Smaller firms use spreadsheets with a template per account. Larger groups use reconciliation modules inside an ERP or dedicated close software that pulls ledger balances automatically, imports bank and subledger data, applies matching rules and routes exceptions for review. Detailed line-by-line matching, described under transaction reconciliation, usually feeds the account-level sign-off. Automation shortens the financial close, but it does not remove the need for a person to judge whether reconciling items are genuine.

• COSO: Guidance on Internal Control
• PCAOB AS 2201: An Audit of Internal Control Over Financial Reporting