A reconciliation is the proof that a ledger balance is right. It compares the balance in the general ledger with an independent source, such as a bank statement, a subledger, a lender statement or a third-party report, and explains every difference. The month-end close checklist says to reconcile everything. This article sets the standard for what a reconciliation must contain, who does and reviews it and how reconciling items are handled. For the glossary definition see account reconciliation.
Required elements
Every reconciliation, whatever the account, should show:
- Account and period. Account number, name and period end date.
- Ledger balance. The balance per the general ledger, agreed to the trial balance.
- Independent balance. The balance per the bank, subledger, statement or other source, with the source named.
- Reconciling items. Each difference listed, with date, amount, description and the action needed.
- Unreconciled difference. Should be zero, or explained and approved.
- Preparer. Name and date.
- Reviewer. Name and date.
- Support. Attached or referenced documents.
A reconciliation with a balance and no source is a schedule, not a reconciliation.
Sources by account type
| Account | Independent source |
|---|---|
| Cash | Bank statement. See bank reconciliation and bank reconciliation review. |
| Accounts receivable | Customer subledger and aged listing |
| Inventory | Perpetual records and count results |
| Prepaids | Amortization schedules and contracts |
| Fixed assets | Asset register |
| Accounts payable | Vendor subledger and vendor statements for key vendors |
| Accrued expenses | Calculation schedules |
| Payroll liabilities | Payroll reports and tax deposit confirmations. See payroll tax deposits. |
| Debt | Lender statements |
| Deferred revenue | Contract schedule. See deferred revenue schedule. |
| Equity | Prior balance plus activity and legal records |
Preparer and reviewer
The preparer performs the reconciliation. The reviewer is a different person where staffing allows, and reviews the reconciliation against the support, not only the signature. Review means checking that the independent balance agrees to the source, reconciling items are reasonable and aged, and the ledger balance agrees to the trial balance. When a small company has one finance person, the owner or an outside accountant reviews bank and credit card reconciliations at least. See internal control for small business.
A reviewer who signs without opening the support is a control that exists only on paper. The reviewer should leave a note for any question raised and see it answered.
Aging reconciling items
Items that stay on a reconciliation become findings. Set an aging policy:
- Current. Items that arose in the period and are expected to clear in the next.
- Aged. Items older than a stated number of days, which need an explanation and an owner.
- Stale. Items older than a longer limit, which need resolution by correction, write-off with approval or escalation.
Examples include outstanding checks, deposits in transit, unapplied cash, unmatched payables and suspense balances. See deposits in transit and outstanding checks. Choose the day limits for the business and write them in the policy. The firm should not import numbers from another company's policy without reason.
Thresholds and materiality
A company can set a threshold under which differences do not need individual explanation, and the threshold must be written down, approved and aggregated, so that many small items do not accumulate. For audit purposes the company's threshold should be below the auditor's clearly trivial level for the account where possible. See materiality in auditing and clearly trivial threshold.
Evidence and retention
Store the reconciliation, the source document and the review note together, by account and period, in a location with access controls. Lock the period when the reconciliation is approved. Keep records for the period the firm's and the company's policies and any legal requirements specify. See audit record retention.
The close calendar
Assign each reconciliation a due business day and a reviewer due day, and track completion on a close checklist. The riskiest accounts, such as cash and payroll liabilities, are reconciled first. See month-end close process checklist and financial close process.
How auditors use reconciliations
Auditors start from reconciliations to test balances. Complete, reviewed reconciliations with clear support reduce the sample the auditor needs to pull and speed up the confirmation process. Poor reconciliations lead to extra procedures and adjustments. See lead schedule audit and PBC list.
Common failures
- Reconciling to a balance that was changed after the reconciliation.
- Plugging a difference to make the reconciliation foot.
- Reviewer sign-off without evidence of review.
- Old reconciling items carried forward without explanation.
- Reconciling an account to another ledger account instead of an external source.
FAQ
Should every account be reconciled monthly?
Balance sheet accounts should be reconciled at least as often as the financial statements are produced, with the riskiest accounts on a fixed monthly schedule.
Can the preparer also review?
Not for the same reconciliation. Where staffing makes it unavoidable, add an owner-level review.
Is a zero balance exempt?
A zero balance still needs a check that nothing is hiding in it, though the support is lighter.
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
Sources
- SBA, Manage your finances: https://www.sba.gov/business-guide/manage-your-business/manage-your-finances
- COSO, Internal Control: https://www.coso.org/internal-control
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AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error