What is Reconciliation in Accounting?

At its most basic level, reconciliation accounting involves comparing two sets of records to ensure that they match and that the balance shown in each set is correct. However, given the complexity of most modern ecommerce companies—which may generate separate sets of records from their banks, payment processors, return solution, and other sources—reconciliation in accounting can prove difficult without the right processes or systems in place.

To better understand the importance of reconciliation, as well as the unique challenges faced by ecommerce retailers, let’s start with some helpful background information.

What is the purpose of reconciliation in accounting?

The easiest way to understand reconciliation is to think of your household budget. Imagine that, throughout each month, you track your income and expenses in a spreadsheet. Then, at the end of the month, you check the running total in your spreadsheet against the total in your bank account. 

If the two sets of records (in this case, your spreadsheet and bank statements) match, your account is considered reconciled. If not, you’ll need to do some digging to understand where the discrepancy occurred. Perhaps you forgot to record the amount left as a tip on a restaurant transaction, or maybe you were double-billed for something unexpectedly. Once you find and resolve the issue, you’re back to a reconciled state.

On a corporate scale, reconciliation serves a similar purpose. Companies that follow the generally accepted accounting principles (GAAP) typically reconcile budget numbers using double-entry bookkeeping, in which transactions are entered into the general ledger twice, in both credit and debit accounts.

When done correctly, reconciliation accounting serves several purposes.

• Companies gain a clear picture of their financial situation, which allows them to avoid overdraft and make better decisions.
• Cleanly reconciled books are also necessary when companies want to sell their businesses, or when they’re pursuing debt financing, IPOs, or investment.
• Account reconciliation helps companies identify fraud, embezzlement, or other financial irregularities that must be addressed quickly.

What accounts should be reconciled?

Although key accounts may vary from company to company, some of the most common accounts to be reconciled include:

• Bank accounts
• Credit card accounts
• Accounts payable
• Accounts receivable
• Payroll
• Fixed assets
• Inventory
• Subscriptions
• Deferred accounts

What are the types of reconciliation?

In addition to general accounts reconciliation, companies may also perform more specific types of reconciliation, including:

• Bank reconciliation: reconciling bank statement line items with other internal records
• Customer reconciliation: reconciling outstanding customer balances with the accounts receivable listed on the general ledger
• Credit card reconciliation: reconciling credit card statement line items with internal financial records 
• Vendor reconciliation: reconciling vendor statements with the accounts payable listed on the general ledger
• Invoice reconciliation: reconciling incoming and outgoing invoices with bank statements or other financial records
• Revenue reconciliation: reconciling all income received during a certain period in order to create up-to-date income statements (P&Ls) and balance sheets
• Balance sheet reconciliation: reconciling the balances of all key accounts on the balance sheet, typically at the end of a financial reporting period
• POS, merchant, or gateway reconciliation: reconciling internal records with reporting from the company’s POS, merchant, or gateway system
  

In some cases, account reconciliation may involve intermediary steps. In the case of credit card reconciliation, for example, companies may need to first match their credit card statements to reporting from their POS in order to match aggregate numbers with their bank statements.

There’s also some level of overlap between the types of reconciliation described above. As an example, invoice reconciliation may encompass customer reconciliation and vendor reconciliation. Individual companies and their accounting teams may use different terminology to describe the specific types of reconciliation they execute.

How do you reconcile accounting when it comes to returns?

Also complicating the reconciliation process for ecommerce merchants is the issue of returns.

Recording an ecommerce transaction under GAAP is more complicated than simply debiting the value of the inventory and recording the total purchase price as a credit on the general ledger. Generally, companies need to:

• Account for any sales tax collected as a separate credit transaction.
• Hold the purchase price of the item (less sales tax) as deferred revenue until the point of recognition (typically, when the item is shipped or received by the customer).
• Debit the cost of goods sold (COGS) from the inventory balance.
  

When returns occur, these journal entries need to be reversed. If the amount of the return changes from the initial purchase—for example, because you charge a return fee or need to issue a refund for a defective item—additional entries may need to be created to ensure the accounts can be properly reconciled. 

Account reconciliation is a critical piece of running a successful business. We recommend getting in touch with an accountant to make sure your business maintains proper account information. 

If you liked this article, you might also like, “How to Calculate Inventory Turnover,” or "The Customer Returns Process and RMA Process Defined."