It then compares account balances between these sources, and identifies any discrepancies so they can be investigated by accounting staff. It takes in data from various sources of financial information, such as ERP systems, bank files or statements, credit card processors, and merchant services. How Does Account Reconciliation Software Work?Īccount reconciliation software automates all the steps in the account reconciliation process. As such, a $900 error should be noted in the reconciliation and an adjusting journal entry should be recorded. Upon further investigation, it is identified that the company recorded bank fees of $1,000 rather than $100. For example, while performing an account reconciliation for a cash account, it may be noted that the general ledger balance is $149,000, but the supporting documentation (i.e., a bank statement) says the bank account has a balance of $149,900. There may be instances where a mistake or error causes a discrepancy between the general ledger and the supporting data. As such, a $20,000 discrepancy due to the missing transactions should be noted in the reconciliation and an adjusting journal entry should be recorded. Upon further investigation, it is identified that four transactions were improperly excluded from the general ledger but were properly included in the credit card processing statement. For example, while performing an account reconciliation for a credit card receivable account, it may be noted that the general ledger balance is $180,000, but the supporting documentation (i.e., credit card processing statement) has a balance of $200,000. There may be instances where activity is captured in the general ledger but not the supporting data or vice versa, which may be due to missing transactions. As such, a $10,000 timing difference due to an outstanding check should be noted in the reconciliation. Upon further investigation, it is identified that the Company wrote a check for $10,000 which has not yet cleared the bank. For example, while performing an account reconciliation for a cash account, it may be noted that the general ledger balance is $100,000, but the supporting documentation (i.e., a bank statement) says the bank account has a balance of $110,000. There may be instances where activity is captured in the general ledger but not the supporting data or vice versa, which may be due to a timing difference. They may be caused by a variety of factors including timing differences, missing transactions, or mistakes. What Causes Reconciliation Discrepancies?ĭiscrepancies may be identified in the reconciliation process. The account reconciliation process must be completed before a company can certify the integrity of its financial information and issue financial statements. This may involve making journal entries to correct balance errors.Īll information found, analysis performed, and actions taken are stored for audit purposes. When discrepancies are found, accountants investigate and take appropriate corrective action. This involves comparing the general ledger account balance with independent systems, third-party data, or other supporting documentation, such as bank and credit card statements. The account reconciliation process is generally carried out after the close of a financial period:Īccountants go through each account in the general ledger of accounts and verify that the balance listed is complete and accurate. What Are the Steps in Account Reconciliation? Many organizations are unable to complete the reconciliation process in a timely manner, which introduces risk. Companies that adopt a more automated, Continuous Accounting approach benefit from a reduced risk of misstatement and a more preventive control environment. Section 404 of the Sarbanes-Oxley Act mandates that public companies include an assessment of their internal controls over financial reporting with their annual report. Doing so allows entities to identify and post all necessary adjustments to the general ledger in a timely manner.Īdditionally, the reconciliation process is an important part of the internal control environment. More specifically, companies must reconcile all balance sheet accounts that could contain a significant or material misstatement. Why Account Reconciliations Are NecessaryĪccount reconciliations are an important step to ensure the completeness and accuracy of the financial statements. Generally, account reconciliations compare the general ledger balance of an account to independent systems, third-party data, or other supporting documentation to substantiate the balance stated in the general ledger. Account reconciliations are activities performed by accountants, typically at the end of an accounting period, to ensure the general ledger account balance is complete and accurate.
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