What is reconciliation?

Reconciliation is the process of comparing two sets of records to verify they match and identifying any discrepancies. For professional service firms, the most common reconciliations are bank reconciliations (comparing the general ledger cash balance to the bank statement balance) and credit card reconciliations (comparing the GL credit card liability to the statement balance). Reconciliation ensures accounting records accurately reflect actual financial activity and catches errors, duplicate transactions, missing entries, or fraudulent charges before they impact financial statements.

Key characteristics of reconciliation

1. Monthly frequency: Bank and credit card reconciliations are done every month

2. Three-way reconciliation: Some firms reconcile merchant processor deposits, bank records, and GL simultaneously

3. Identifies discrepancies: Timing differences, errors, missing transactions, unauthorized charges

4. Requires supporting documents: Bank statements, credit card statements, receipts

5. Sign-off process: Someone reviews and approves each reconciliation

Why reconciliation matters for service firms

Unreconciled accounts hide errors and fraud. A consulting firm discovers $12,000 in duplicate expense reimbursements during reconciliation, preventing financial statement errors and tax overpayment. Bank reconciliations catch bookkeeping errors: a $25,000 client payment recorded as $52,000 results in $27,000 of artificial revenue inflation. Monthly reconciliations identify unusual activity quickly; quarterly reconciliations allow errors to compound for months. Clean reconciliations are required for audits, loan applications, and due diligence. Firms with unreconciled accounts face increased audit scrutiny and reduced credibility.

Example: Bank reconciliation for a consulting firm

1. General ledger cash balance (March 31): $183,450

2. Bank statement balance (March 31): $188,200

Reconciling items:

1. Outstanding checks:

2. Check #3842 to vendor: -$2,800

3. Check #3845 to contractor: -$4,500

4. Check #3847 to landlord: -$3,200

5. Total outstanding checks: -$10,500

Deposits in transit:

1. Client payment deposited 3/31, cleared 4/1: +$8,500

Bank charges not yet recorded in GL:

1. Monthly service fee: -$35

2. Wire transfer fee: -$45

3. Total bank charges: -$80

Interest earned not yet recorded:

1. March interest: +$12

Adjusted GL balance calculation:

1. Starting GL balance: $183,450

2. Less: Bank charges: -$80

3. Plus: Interest earned: +$12

4. Adjusted GL balance: $183,382

Adjusted bank balance calculation:

1. Starting bank balance: $188,200

2. Less: Outstanding checks: -$10,500

3. Plus: Deposits in transit: +$8,500

4. Adjusted bank balance: $186,200

5. Discrepancy identified: $2,818 difference requires investigation

6. Investigation reveals: $2,800 check #3842 was recorded twice in GL

7. Correcting entry: Debit Cash $2,800, Credit Accounts Payable $2,800