What Are Account Reconciliations, and Why, Oh Why, Do We Have to Do Them?

Here at FloQast, with our direct integration with Excel files, we see lots of Excel files. And with FloQast AutoRec, we see many account reconciliations. Often, as we look through them, we get asked about the best practices with account reconciliations, and how other clients are working with Excel and FloQast.

I started to look around the web to see what had been written, and what guidance is available. Most of what is available tries to sell you software; not surprising, right? What was surprising was that it doesn’t describe either why or how we do reconciliations. Most descriptions are just inadequate, or just clearly not written by an accountant, or by anyone who has ever even done an account reconciliation.

So, as accountants here at FloQast, we thought we’d take a shot at it. 

What Are Account Reconciliations?

An account reconciliation provides evidence that the account balance in the general ledger is a reasonable representation of reality. In simpler terms, an account reconciliation should show how close the balance in the general ledger is to the real world.

Why Do We Do Them?

We do them because those GL account balances are the numbers that go into each and every financial statement we have to produce for stockholders, investors, banks, and regulatory agencies. And, those statements have to be as accurate and as close to reality as possible.

How Do We Get Accurate Balances in Our GL?

We reconcile each balance sheet account (or at least the critical ones, or as many as we can get through). How do we reconcile? Depends on the account. To reconcile a balance sheet account properly, you have to use the type of account reconciliation that truly compares the GL account balance to the real world. 

Bank Accounts / Subledger Accounts

To reconcile a bank account, you compare the GL account balance to the bank account balance as of the same date. If these balances are not the same, you have to find which transactions from the general ledger did not clear at the bank and which transactions at the bank that were not recorded in the general ledger. The account reconciliation for the bank starts with the general ledger balance, plus any transactions cleared at the bank that were not recorded in the general ledger. The sum of these gives you an adjusted general ledger balance — namely, what the general ledger balance should be if all the business transactions were properly recorded in the general ledger. Then you sum the bank balance, plus any general ledger transactions that haven’t yet cleared the bank account, and you get to the adjusted bank balance. Done accurately, these two adjusted balances agree to one another. The adjusted general ledger balance (or the adjusted bank balance, since they are the same) represents the real balance of the account if all the business activity is properly recorded. The account reconciliation’s calculation of the adjusted balance shows clearly if any material adjustment is needed to the general ledger balance before financial statements are issued using the general ledger balances.

Even if the difference is not sufficiently material to require an adjustment to the general ledger balance prior to issuing financial statements, the account reconciliation process provides the right information needed for any corrections to the general ledger. The account reconciliation should also include an aging of the outstanding transactions, to ensure that corrections to the general ledger are made on a timely basis.

This type of reconciliation also applies to any account that represents a subledger, a separate system of detail records, such as accounts receivable, accounts payable, inventory, or fixed assets.

This type of account reconciliation can be referred to as a bank/subledger reconciliation. If used for fixed asset accounts, the account reconciliation should also include a roll-forward schedule for both the asset and for the accumulated depreciation accounts. A roll-forward schedule is needed for the larger asset or liability accounts to provide visibility to the nature of the movements in the accounts. It shows the beginning balance for the accounts for the reporting months, summarized amounts of the large movements, like acquisitions, or disposals, and the ending balance. This type applies to fixed assets, investments and long term debt.

When the bank/subledger reconciliation type is used for accounts receivable or accounts payable, the account reconciliation should also provide an analysis of the unpaid invoices to determine if there are any collection or payment issues, or to determine if there are large prepayments that would need to be reclassified for financial statement purposes. 

What About Accounts Where No Subledger Exists, Such as a Prepaid Account, or Fixed Assets When a Subledger System Is Not Used?

For accounts like prepaid expenses, deferred revenue, or fixed assets, an amortization-type reconciliation is used to calculate the monthly amortization or depreciation (for the journal entry), as well as the expected ending balance for each month. These reconciliations, effectively, become the “subledger” for the account — storing all the historical details of each asset, or expense or revenue contract, and exactly how that item was amortized or depreciated over time. And then, of course, calculating the account balances, which then are used to tie-out to the general ledger balances.

What About the Rest of the Accounts in the Balance Sheet?

Once you move beyond bank, subledger, and amortization accounts, considered broadly, the format of account reconciliations becomes very specific to the fundamental purpose of the account, and to how the general ledger account balance can be justified and explained. The key for each account is to consider what source is available to compare to the general ledger balance, such as the bank account itself or a checking account in the general ledger, or an inventory system for the inventory account in the general ledger. In some cases, the account reconciliation itself provides the detail for the general ledger account balance, such as for a miscellaneous Accounts Receivable account, which is not being tracked in your Accounts Receivable subledger. The account’s reconciliation may also require specific schedules that will be needed in your reporting, such as schedules to show the movements in large accounts or to determine if reclassifications are needed.

Here at FloQast, because of our experience as auditors and accountants, we are focused on how we can do as much of the account reconciliation process for you, so you can actually spend your time working directly with your colleagues to help improve business outcomes.

While often a company’s account reconciliations are very specific to that company, we’ve seen many patterns across companies’ reconciliations where a standardized template could save you substantial time, ease the onboarding of new staff, and reduce review and audit time. Our view is that we can build the structure of many, if not most, of your account reconciliations for you, starting with your ERP transactions and standardized Excel templates. This way the tie-out is basically done for you, and you can spend your time focusing on your business instead. We’ve started this process with AutoRec, which creates the Bank/Subledger reconciliation, and are now moving into building the Amortization reconciliation. We’d love to hear from you about which reconciliation types we should build out next.

Erika Heckscher

As a CPA (inactive) with many years of experience in both industry and consulting doing a variety of finance systems implementations, Erika Heckscher lends a wide perspective to the FloQast Product team. In her role as Product Manager, Erika leads development on FloQast AutoRec.