Reconciliation Account

A reconciliation account is an account kept specifically so that two sets of records can be compared and shown to agree. In general accounting, especially in enterprise systems such as SAP, it is a general ledger account that automatically collects the totals of a subsidiary ledger, such as customer or supplier accounts, so that the general ledger always matches the detail. In banking and payments, the term is also used for an internal account that mirrors an external one, such as a nostro or settlement account, so that the bank's own entries can be matched against the statements it receives.

A reconciliation account is a thing; account reconciliation is a process. The account provides a place where balances and entries are recorded in a form that makes comparison possible, while reconciliation is the work of comparing, matching and investigating differences. The two are often mentioned together, which is why the terms are easily confused.

Picture a household that keeps a notebook for each child's pocket money, plus one summary page that shows the total owed to all the children. Every time a parent writes in a child's notebook, the summary page is updated too. If the summary ever disagrees with the notebooks added together, something has been missed. The summary page is the reconciliation account: it is the checkpoint that proves the detail and the totals match.

Banks do a similar thing with accounts held at other banks. They keep their own copy of what should be in an account held elsewhere, then compare it line by line with the other bank's statement. The copy is the reconciliation account, and any line that appears on only one side becomes an item to chase.

In many accounting systems, detailed records for individual customers and suppliers are kept in a subsidiary ledger, while the general ledger holds only summary accounts. A reconciliation account, also called a control account, links the two. In SAP's financial accounting module, for example, each customer or vendor master record is assigned a reconciliation account, and every posting to that customer or vendor is automatically posted to the reconciliation account at the same time. Direct postings to the reconciliation account are normally blocked, so the only way to change it is through the subsidiary ledger.

This design means the balance of accounts receivable or accounts payable in the financial statements always equals the sum of the individual balances. Companies can assign different reconciliation accounts to different groups, such as domestic and foreign customers or related parties, to support reporting.

Banks hold accounts with other banks, with central banks and with payment systems. Each has an external statement produced by the account-holding institution and an internal record in the bank's own books. The internal record, sometimes called a mirror or reconciliation account, is updated whenever the bank sends or expects a payment. Common examples include:

• Nostro mirrors. A bank's internal record of its nostro account in a foreign currency, matched daily against the correspondent's statement as part of nostro reconciliation.
• Settlement account mirrors. Internal records of a settlement account at the central bank or a payment system, compared with end-of-day statements from the system.
• Scheme settlement accounts. Records of what card networks or clearing houses should pay or collect, compared with their settlement reports.
• Clearing and transit accounts. A clearing account that holds items between initiation and settlement should return to zero once everything has been matched.

A suspense account holds entries that cannot yet be allocated, such as a payment without a clear reference. It is a temporary home for unexplained items. A reconciliation account, by contrast, is a permanent part of the account structure whose purpose is to keep two records aligned. Items that fail to match may be moved to suspense while they are investigated, but the two accounts serve different purposes. Nor is a reconciliation account the same as the external account it mirrors: the external account holds the actual money, while the reconciliation account is the bank's own record of what should be there.

• Restrict manual postings. Blocking direct entries keeps the account a true reflection of the detail beneath it.
• Reconcile frequently. High-volume accounts are usually matched daily, with automated tools for routine items and staff handling exceptions.
• Age and escalate breaks. Unmatched items are tracked by age, and old items are escalated because they may hide errors, fraud or losses.
• Separate duties. The person who posts entries should not also sign off the reconciliation, in line with segregation of duties.

Auditors and regulators regard well-maintained reconciliation accounts as a basic internal control. Unreconciled balances on these accounts are a common audit finding and can point to weaknesses in the wider bank reconciliation process.