How is a statement of account reconciled — how do I tie the balances and items on a statement of account to my own records?

What is a statement of account, and what do you compare it with?

A statement of account is a detailed report of the contents of an account. The usual example is a seller's statement to a customer. It shows what was billed and paid during a period, ending in a closing balance. It normally begins with the total of unpaid invoices brought forward, then lists each invoice, credit and payment in the period, with numbers, dates and amounts.

The statement is the other party's record. It is not a bank statement, and it has no more authority over your books than your own ledger has over theirs. Its value is that you can check your records against an independent record: a supplier statement is a source document you can use to reconcile and verify the data you hold about that supplier.

What you compare it with depends on which side of the relationship you are on:

• A supplier sent you a statement. Compare it with your payables record for that supplier: the vendor ledger, or the list of open bills and payments in your accounting software. The total accounts payable balance in the general ledger is no use here, because you need the detail for that one supplier.
• A customer is disputing a statement you sent. Compare the statement with your receivables record for that customer, then with whatever the customer's own records show. Now you hold the invoices and delivery evidence, and the customer holds the proof of payment. Most requests for evidence run the other way.

Which form of statement do you have, and what can it tell you?

Before you match anything, work out which form of statement you have.

Open-item statement. This lists each unpaid invoice, credit or adjustment separately, with what remains of it. Under open-item accounting, payments are matched against specific bills. You can reconcile line by line: for each document on the statement, find the same document in your ledger.

Balance-forward statement. This rolls everything left over from earlier periods into one opening figure, and then normally lists the current period's activity. Payments are not matched to particular bills; they are typically treated as relieving the oldest debt first. You can reconcile this period's activity and the opening figure, but the statement cannot tell you which old invoice a single-figure difference sits in.

This matters when a difference will not clear. With an open-item statement, the unmatched document is in front of you, however old it is. With a balance-forward statement, you have to ask the counterparty for an open-item listing or a transaction history, going back to the last date both sides agreed. Without one, you cannot match individual items, and trying to is wasted work.

Why agree the opening balance before looking at anything else?

Because it controls everything that follows. A statement works like a sum: opening balance, plus invoices, minus credits and payments, equals closing balance. If the two opening figures differ by 200.00, you can match every item in the period perfectly and the closing figures will still be 200.00 apart. You will then hunt through the current month for a difference that is not there.

So compare the statement's opening figure with your ledger balance for that party on the same date. Agreed does not mean equal: the statement opens at the counterparty's last closing balance and your ledger at yours, so the two normally differ by whatever was still open at the end of last period.

• The two figures are equal. Go on to the period's items.
• They differ by exactly the items left open on last period's bridge. The opening position is agreed. Carry those items into this bridge and check that each has now cleared: a payment that was in transit then should appear on this statement, and a credit you were owed should have been issued. Chase any that has not.
• Something is left that last period's open items do not explain. Only then go back to the last period you reconciled, or the earliest date both records agree, and rebuild forward from there. The same logic is used when a payables ledger is reconciled internally: if the prior period does not agree, the earlier periods are reconciled before the current one, although an immaterial variance may be acceptable to carry while you proceed with the current period.

If you do proceed, show the opening difference as its own named line on the bridge, never folded into another item.

How do you lay out the reconciliation as a bridge?

Start with the counterparty's closing figure. List every item that explains the difference, one line each. End with your own balance. Each line has four parts: a document reference and date, the amount, the class of difference, and who has to act.

Never net items into one "difference" line. Two errors can cancel out. For example, a 300.00 credit you recorded that the supplier never issued leaves your ledger 300.00 below the statement, and a 300.00 invoice you entered twice leaves it 300.00 above; netted together, they come to zero. A netted comparison would show agreement with two real problems hidden inside it. Listing items one by one is what shows that the two balances differ only for reasons you can name.

A worked bridge

The figures below are invented. You buy from a supplier on credit. Their statement for August shows an opening balance of 4,100.00 and a closing balance of 8,460.00. Your vendor ledger showed 4,100.00 at July 31, so the opening balances agree. Your ledger shows 5,880.00 at August 31.

Check: 8,460.00 − 1,500.00 − 1,240.00 − 300.00 + 90.00 − 30.00 + 400.00 = 5,880.00. Line g changes neither total, which is why it only shows up when you check item by item.

After you correct lines d and f, your ledger stands at 5,390.00 (5,880.00 − 90.00 − 400.00). Everything left in the bridge is either the supplier's to fix or still open. September therefore opens 3,070.00 apart (8,460.00 − 5,390.00), and that gap is lines a, b, c and e carried forward: an agreed opening position, not a new difference.

What kinds of difference will you find, and how do you tell them apart?

Supplier statement reconciliations typically turn up unrecorded invoices, unapplied credits and timing differences. The usual causes are payments not yet received, invoices posted to the wrong supplier, credit or debit notes not processed, discounts handled incorrectly, and transposition errors when keying an invoice. Each class has a test you can run with what you already hold.

• Payment sent, not yet applied. Your payment is dated near the end of the period and is missing from the statement. Check your bank record: has the check cleared, or the transfer left your account? If it has not cleared, or cleared only after the statement date, it is a timing difference, not an error: nobody acts, the supplier updates their records when the payment arrives, and you confirm it on the next statement. If it cleared before the statement date and is still missing, it is not timing: send the supplier the payment date, amount and bank reference and ask them to locate and apply it.
• Invoice issued, not received or not entered. It is on the statement and not in your ledger. Look for it in your mailbox, your approval queue and any invoice posted to another vendor record. If it is not there, it goes to the evidence step below.
• Credit or return on one side only. You recorded a return or an agreed allowance, and the supplier has not issued the credit, or has issued one you have not entered. Credit notes do not have to cover the whole invoice, so a partial credit is not wrong just because it is partial.
• Applied to the wrong document. The totals agree, but a payment or credit sits against a different invoice number than the one you specified. Compare the invoices marked open on each side, not just the balances.
• Adjacent period. The document is dated just before or after the statement's cut-off date. Compare the document date with the statement date before calling it missing.
• Disputed. Both sides have the item and disagree about it: price, quantity, discount, or whether the goods arrived.

What has to agree within a matched item?

Matching a document number is not enough. Check five things:

• Amount. A different amount on the same document can be a keying error, such as transposed digits: 540.00 against 450.00 in line d.
• Date. Different dates for the same document can push it into another period on one side.
• Document reference. The same amount under a different number can mean an invoice posted twice, or a payment applied to the wrong bill.
• Discount. If you paid net of an early-payment discount, check that the supplier allowed it. Otherwise the discount remains as a balance on their side.
• Partial application. If you paid part of an invoice, check that the remaining balance on each side is the same, not just that the payment appears.

What evidence do you need before recording an item only the counterparty shows?

This step decides whether reconciling prevents a payment for something you never received, or causes one. The test to apply before you record it is the one used when payables are verified: that the liability is legitimate, properly authorized, and reflects goods or services actually received.

For an invoice that appears only on the supplier's statement, ask the supplier for:

• a copy of the invoice, with its number, date, what was supplied and the price
• the purchase order or other authority it was raised against
• proof of delivery or completion

Then check internally that someone ordered the goods and that they arrived. Approving a supplier invoice is a stronger control when the reviewer sees the invoice, the purchase order and the receiving documentation together. Matching these documents in detail belongs to invoice and purchase-order matching, not to statement reconciliation.

• Evidence confirms it. Record the invoice with its own date and number, and approve it the normal way.
• Evidence shows it is not yours. Tell the supplier, with your reasons, and keep the line open until it comes off their statement.
• No evidence arrives. Keep the line open. Do not record it and do not write it off.

Do not dismiss an item as the supplier's mistake without asking for the document. It may be a genuine bill that never reached you, and it will come back later with less evidence to go on.

Whose record changes when the two disagree?

Your ledger records what your documents support. The statement is evidence to check against, not an instruction. That gives three outcomes:

• You correct your own records when your own documents show your entry was wrong: a keying error, an invoice in the wrong period, a bill posted to the wrong supplier, or an invoice you now have evidence for. A difference on the same invoice means one side processed it wrongly. The invoice itself shows which.
• You ask the counterparty to correct theirs when your documents show your entry was right: a credit they owe, a payment they misapplied, a charge you have evidence against.
• The item stays open when it is a timing difference that will clear on its own, or a dispute not yet settled. An open line with its support on file is a finished reconciliation, not an unfinished one.

Never post an adjusting entry just to make your ledger match the statement's balance. That can accept a charge you never incurred, or reverse a payment you already made.

How do you put your position to the counterparty, and what do you keep?

Send the lines that are theirs to act on, not the whole difference. For each one, give the document number, date and amount, and what you want done. For example: "our check 4417 of Aug 30 for 1,500.00", "please issue a credit note for goods returned Aug 20", "please re-apply our July payment to invoice 2195". Reconciling promptly means differences can be investigated and discussed with the supplier while they are recent.

If the supplier is pressing you to pay the statement balance, do not pay the statement total. Pay what the reconciliation supports: invoices you hold and have approved, less credits you are owed. List each amount you are holding back, with its reason and reference, in the same message as the payment. Paying the full statement pays for items you have not checked, and recovering any of it then depends on the supplier agreeing to a credit or refund.

If the counterparty applies payments its own way, for example to the oldest debt first, the totals can agree while every item sits against the wrong invoice. To catch it, compare the invoices each side shows as open. Ask the counterparty to apply payments against the invoice numbers on your remittance, and send remittance details with every payment so the next statement can be reconciled.

If a customer disputes your statement, reverse the evidence roles. Your invoices, delivery records and credit notes support your side, and you ask the customer for the remittance details and bank reference of any payment they say they made. Where the customer is right, the correction is in your receivables. Fixing receivables that show paid invoices as unpaid is covered separately.

Keep the bridge, the statement and the correspondence at least until every open line clears. The supporting documents themselves (paid bills, invoices, receipts and canceled checks) are records a business should keep in any case, because they support the entries in your books and on your tax return, so an item clearing is not a reason to discard them.

How often should you reconcile statements, and what should prompt one?

For your major suppliers and customers, reconcile every statement as it arrives. Statements usually go out right after month-end, so monthly is the natural cycle. For small, occasional accounts, reconcile when an event forces it.

Reconcile outside the cycle whenever:

• you get a demand to pay, or an overdue notice
• a counterparty disputes a balance
• you are about to make a large or final payment, or close the account
• a statement arrives out of its usual pattern, for example a sudden credit balance or a charge you do not recognise

Starting next month from an agreed, documented position is what keeps each reconciliation short.