What is an accounts receivable reconciliation?
An accounts receivable reconciliation, or AR reconciliation, is the month-end check that the total of what each customer owes you, in your aging report, equals the receivables balance in your general ledger on the same date. When the two agree, you know the balance on your balance sheet is backed by real invoices to real customers. When they do not, the gap is made of reconciling items, and your job is to find each one, fix it where it started and keep a record of what you did, so the month closes with everything in order and nothing left to explain.
Why do the aging report and the ledger disagree?
They disagree because something reached one record and not the other. The aging report, sometimes called the receivables subledger, lists every open invoice by customer and by how long it has been unpaid. The general ledger holds one receivables account, often called the control account, whose balance should be the total of that list. An invoice, a payment or a credit note posted to a customer moves the customer’s balance and the control account together. Some accounting systems will not let any entry reach the receivables account without naming a customer, and there the two totals rarely drift. Others will, and so will any setup where invoices are kept in a separate billing tool or spreadsheet. The trouble starts with entries that skip the customer:
- A manual journal entry posted straight to the receivables account, such as a write-off or a correction, which moves the ledger but no customer’s balance.
- A payment recorded the wrong way, as a deposit or a journal rather than as a payment applied to the invoice it pays.
- A posting to the wrong account, where an entry meant for sales tax or another balance sheet account lands in receivables.
- A date mismatch, where the aging report is run on one date and the ledger balance is read on another.
A reconciliation finds these because it compares the two totals and then explains every dollar between them.
What do you need before you start?
You need four things, all on the same date, usually the last day of the month you are closing. First, the aging report, with its total, run as of month end. Second, the receivables account’s balance from your trial balance or balance sheet on that date. Third, the detail of every entry posted to the receivables account during the month, so you can see the journals as well as the invoices and payments. Fourth, last month’s reconciliation, because a month that started from an unexplained gap will carry it forward until somebody traces it back.
How do you reconcile accounts receivable, step by step?
You work from the two totals inward, explaining the difference until nothing is left over. Most months take five steps.
- Run both totalsThe aging report and the receivables account, on the same date.
- Find the differenceSubtract one from the other.
- List the entries that skip customersJournals and postings made straight to the receivables account.
- Fix each item at its sourceCorrect the record where it started.
- Tie and sign offBoth totals agree, and the record says what was fixed.
- Run both totals on the same date. Run the aging report as of month end and read the receivables account’s balance on the same day. If the dates differ, every invoice and payment between them becomes a false difference.
- Find the difference. Subtract the ledger balance from the aging report total. Note which one is higher, because that tells you what kind of entry to look for.
- List the entries that skip the customer. Filter the receivables account’s detail for journal entries and for any line with no customer on it, and check each against the difference you found.
- Fix each item at its source. A write-off belongs against the customer’s invoice, a payment belongs applied to the invoice it pays, and a posting to the wrong account is reversed and posted again to the right one.
- Tie and sign off. Run both totals again. When they agree, save the aging report, the ledger balance and the list of items you fixed, with who fixed each and when.
What are the usual reconciling items?
The usual items are the ones that change the ledger without changing a customer’s balance, or the reverse. A write-off posted as a journal is the most common, followed by payments recorded as journals or deposits, entries posted to receivables by mistake, and credit notes entered in the wrong period. Less often, the cause is a customer record merged or deleted after invoices were posted to it, or an opening balance carried over from an older system that never matched.
Each item has a direction. If the aging report is higher than the ledger, look for credits to the receivables account with no customer on them, such as a write-off journal. If the ledger is higher, look for debits with no customer, such as an entry posted to the wrong account.
Worked example: September’s receivables at Ferrygate
Ferrygate Plumbing & Heating is an invented company, one of the Demo companies Ressura uses to show its checks, and every figure below is made up for the example. It is a plumbing and heating contractor in Tacoma that invoices customers by the job, and its bookkeeper reconciles receivables at the end of every month. In this example, its ledger lets a journal post straight to the receivables account without naming a customer.
On 30 September the aging report totals $186,420.00, and the receivables account in the ledger reads $183,915.00. The aging report is $2,505.00 higher, so the bookkeeper starts with credits to the receivables account that no customer carries. The account’s detail for September shows three entries that skip a customer:
- A write-off journal of $1,450.00, crediting receivables for a job whose customer had closed. The ledger dropped, but the invoice still sat open in the aging report.
- A payment of $2,135.00 from Westgate Senior Living, recorded as a journal crediting receivables instead of as a payment applied to its invoice. Again the ledger dropped and the invoice stayed open.
- A sales tax correction of $1,080.00, debited to receivables by mistake instead of to sales tax payable. This one raised the ledger with no customer behind it.
The three explain the gap exactly: $1,450.00 plus $2,135.00, less $1,080.00, is $2,505.00. The bookkeeper records the write-off against the closed customer’s invoice, deletes the payment journal and applies the payment to Westgate’s invoice, and reverses the sales tax entry and posts it again to the right account. Both totals now read $182,835.00, and the reconciliation is saved with the three items, what was done to each and the date.
One more thing does not show in the difference at all. Ferrygate’s agreement with Commencement Bay Apartments lets it bill a quarterly maintenance fee, and the fee for the quarter was never invoiced. With no invoice there is nothing in the aging report and nothing in the ledger, so the reconciliation ties while the money stays uncollected. A reconciliation proves the two records agree, not that every invoice you were owed was sent.
What do you do when a balance will not be paid?
You write it off against the customer’s invoice, so the aging report and the ledger move together, and you note why it will not be paid. Look first at anything long past its payment terms, such as 90 days or more, and ask whether the customer can still pay. For tax, the IRS’s page on bad debt deductions says a business can deduct a bad debt only if the amount was included in its gross income in the current or an earlier year. Under the accrual method, which IRS Publication 538 describes as reporting income in the year it is earned whether or not it has been received, an invoice you sent was already counted as income, so a balance that becomes worthless can be deducted. Under the cash method an unpaid invoice was never counted, so there is generally nothing to deduct.
How often should you reconcile accounts receivable?
Reconcile every month, as part of the close, and before anyone outside the company reads your balance sheet. A month’s reconciliation has a handful of items you still remember, while a year’s has dozens that nobody can explain. The GAO’s Standards for Internal Control in the Federal Government, known as the Green Book, lists reconciliations among the control activities built into everyday processes, alongside verifications, approvals and supervisory review. An auditor will go further than your reconciliation: the PCAOB’s AS 2310 on confirmation says the auditor should confirm accounts receivable with an outside source, such as your customers, or otherwise get that evidence directly from one. A balance you have reconciled every month is one you can answer for when those replies come back.
For the places a receivables balance can be wrong on purpose, such as a credit note with nothing behind it, see where receivables fraud risk hides.
How can Ressura help with the reconciliation?
Ressura’s General Ledger Module checks that the payables, receivables, cash and asset balances in your ledger equal the totals of the detailed records behind them, and flags a balance left in a suspense account for more than 30 days at period end. Its Order-to-Cash Module reads what you invoice against what each customer agreed, shows an invoice past its payment terms with the days overdue and the amount still owed, and raises a fee the agreement lets you invoice for a period when no invoice covers it, the gap a reconciliation cannot see. A ledger export is enough to start, and QuickBooks or Xero can be connected later. When everything ties, the result says what was checked, so you can take it to your boss as proof the month is in order.