# Account Reconciliation: What the Procedure Is and How It Works

> **Definition**
>
> Accounting reconciliation involves comparing two sets of records to ensure accuracy and agreement, confirming that the accounts in a general ledger are consistent and complete.

## What Is Account Reconciliation?

Account reconciliation is the process that makes sure financial records match external financial statements such as bank statements, invoices, or credit card bills. It helps verify that recorded financial transactions are accurate. Account reconciliations play a part in internal auditing and external auditing, where financial balances are verified as part of validating published financial reports.

### Key Takeaways

*   Account reconciliations help identify inaccuracies and prevent fraud.
*   The account reconciliation process involves cross-checking internal records with external statements, such as [bank statements](https://www.investopedia.com/terms/b/bank-statement.asp) or invoices, and identifying any discrepancies.
*   The reconciliation process is important for both businesses and individuals as it is essential for maintaining accurate financial records and ensuring overall financial stability.

![Reconciliation](https://www.investopedia.com/thmb/7cPmWGGrrERvleqsIXNWlsV4NOs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/reconciliation-4190406-1234b4d6e7ba4cb197102c37ef0e6413.jpg)

*This process can help businesses detect errors or fraud early on. — Investopedia / Joules Garcia*

## How Account Reconciliation Works

Account reconciliation involves reviewing and comparing your recorded transactions against external financial documents like [bank statements](https://www.investopedia.com/terms/b/bank-statement.asp) and receipts to confirm their accuracy. The goal is to ensure that no discrepancies exist that could lead to financial mismanagement.

The process helps individuals avoid [overdraft](https://www.investopedia.com/terms/o/overdraft.asp) fees, spot incorrect charges, and more, while businesses can use it to maintain accurate financial records, comply with regulations, and uncover fraud.

### How to Perform Account Reconciliation

1.  Gather financial records, such as bank statements, [credit card](https://www.investopedia.com/terms/c/creditcard.asp) bills, ledgers, invoices, and receipts.
2.  Compare the recorded transactions in your books with these external statements.
3.  Identify any discrepancies, such as missing transactions or incorrect amounts.
4.  Investigate the discrepancies and resolve the differences by making necessary corrections.
5.  Document the reconciliation process for future reference and [audits](https://www.investopedia.com/terms/a/audit.asp).

By regularly following these steps, businesses and individuals can confirm that their financial statements accurately represent their financial profile.

## Types of Account Reconciliation

Account reconciliation serves a variety of purposes and can be done across many different types of financial accounts. Here are a few areas where account reconciliation is most applicable:

*   Bank reconciliation ensures that cash records align with bank statements.
*   Vendor reconciliation verifies that [accounts payable (AP)](https://www.investopedia.com/terms/a/accountspayable.asp) matches vendor/supplier invoices.
*   Customer reconciliation checks that [accounts receivable (AR)](https://www.investopedia.com/terms/a/accountsreceivable.asp) records line up with customer payments.
*   Intercompany reconciliation determines the consistency of the financial records across different divisions of a company. This is generally applicable to large companies.
*   Credit card reconciliation confirms charges on credit card statements align with expenses.

## Importance of Account Reconciliation

Account reconciliation is more important than just ensuring the numbers on statements are correct; it's about [financial health](https://www.investopedia.com/terms/f/financial-health.asp). For individuals, regularly reconciling accounts can help prevent overspending, help track expenses, and avoid unnecessary fees and credit card debt.

If you've ever been surprised by a low bank balance and not understood why, reconciliation can help you see where your money is going.

For businesses, account reconciliation is necessary for financial stability. It helps track revenues and expenses accurately, ensuring that profits aren't overestimated and costs aren't underestimated. Regular reconciliation also prevents [cash flow](https://www.investopedia.com/terms/c/cashflow.asp) issues, tax errors, and potential legal troubles.

In addition, the reconciliation process acts as a safeguard against fraud, dishonest employees, and unauthorized transactions.  

## Example of Account Reconciliation

Here's a hypothetical example to show how account reconciliation works. Let's say during Company ABC's quarterly account reconciliation process, it notices a discrepancy between its ledger balance of $10,500 and the bank statement showing $10,200. Upon review, ABC finds:

*   A $500 check that hasn't cleared
*   A $100 bank [service charge](https://www.investopedia.com/terms/s/service-charge.asp) by the bank
*   A $300 customer deposit that is not recorded in the ledger

After ABC adjusts for these differences, the updated [ledger](https://www.investopedia.com/terms/g/generalledger.asp) matches the bank's statement:

$10,500 (ledger balance) - $500 (outstanding check) - $100 (bank service fee) + $300 (customer deposit) = $10,200 (bank balance).  

## The Bottom Line

Whether you manage a business or your finances, account reconciliation can help keep your financial health in check. By regularly reviewing and verifying your records, you can catch errors, prevent fraud, and ensure your finances are accurate.