How to Reconcile Accounts Receivable: Steps, Controls, and Write-Offs

To reconcile accounts receivable, pull your general ledger AR balance and your AR sub-ledger (the aging report) as of the same moment, compare the totals, and if they don’t match, use a roll-forward calculation and a payment-by-payment review to find the difference. Real errors get fixed with adjusting journal entries, credit memos, or write-offs; timing differences get documented and left to resolve themselves. Done monthly, the process keeps your balance sheet honest and catches billing mistakes, misapplied payments, and certain kinds of fraud before they compound.

What You Need Before You Start

Two reports do most of the work: the general ledger balance for the accounts receivable account, and the sub-ledger (aging report) that breaks that total down customer by customer and groups unpaid invoices into buckets, typically current, 1–30 days past due, 31–60, 61–90, and over 90.

Both reports have to be generated as of the exact same date and time. Pull the aging at noon and close the ledger at midnight and any transactions posted in between will show up as a false discrepancy. If your business runs invoicing through a separate billing system, confirm that every source of AR data actually feeds into the same ledger before you begin. Invoices created somewhere that never syncs to the general ledger are one of the most common reasons the two reports don’t match from the first line.

Alongside those reports, gather the supporting records for the period:

Sales invoices issued during the period
Cash receipt records for checks, wire transfers, and electronic payments
Bank statements covering the same period, so deposits can be traced to specific customers
Credit memos and adjustments — returns, discounts, billing corrections

How Often to Reconcile

Most businesses reconcile AR monthly, as part of month-end close. Monthly cadence catches mistakes before a single miscoded entry travels across several periods and becomes hard to trace. High-volume operations or businesses that extend a lot of credit often add weekly spot-checks on their biggest accounts. A small operation with a handful of customers can sometimes get by with a quarterly review. The variable is risk: more invoices and payments means more chances for something to slip.

The Reconciliation Steps

Compare the General Ledger to the Sub-Ledger

Add up every customer balance in the sub-ledger and compare that total to the AR balance in the general ledger. Match? The reconciliation is essentially done, and you can move on to reviewing the aging detail for stale balances that need attention. No match? The gap between the two numbers is your starting point.

Run the Roll-Forward

Before hunting through individual transactions, verify the overall math:

Beginning AR balance (the prior period’s ending balance)
Plus new invoices issued during the period
Minus payments received
Minus credit memos, write-offs, and other adjustments
Equals the ending AR balance

If that calculation doesn’t produce the ending balance shown in the ledger or the sub-ledger, something was posted wrong, posted to the wrong period, or missed entirely. The formula narrows your search to invoices, payments, or adjustments rather than the whole account.

Match Payments to the Right Accounts

Check each payment recorded in the sub-ledger against bank deposits and cash receipt records. This catches a common error where a customer’s payment lands on the wrong account: one balance is too high, another too low, and the total may still look fine. Look also for discounts taken or short-payments that were never recorded — those leave a phantom balance in the sub-ledger that doesn’t reflect anything the customer actually owes.

Identify Timing Differences

A sale recorded in the general ledger on the last day of a month but invoiced in the sub-ledger on the first of the next will create a mismatch even though nothing is wrong. Deposits hitting the bank before they’re posted to the customer’s account cause the same effect, in either direction. Timing differences don’t need correction; they resolve on their own next period. Document them anyway, so you can tell a timing issue apart from an actual error later.

Recognize Common Error Patterns

The shape of the discrepancy often points to its cause. A difference evenly divisible by nine usually means a transposition — two digits reversed on entry. Swapping any two adjacent digits always produces a multiple of nine. A discrepancy that’s a round number, like exactly $500 or $1,000, often means an entire entry was missed or posted twice. Knowing these patterns saves you from reading every line.

When a Small Difference Can Be Ignored

Not every penny justifies an hour of investigation. Businesses commonly set a materiality threshold — a dollar figure or percentage below which differences aren’t researched individually. Five percent of the account balance is a common starting point, though the SEC has cautioned that relying exclusively on any single percentage has no basis in accounting standards or law. Qualitative factors matter: a small discrepancy that masks a shift in earnings, threatens a loan covenant, or reflects deliberate manipulation can be material regardless of size.

Use the percentage as a screen and apply judgment. A $12 rounding difference on a $200,000 balance rarely warrants a look. A $12 difference that recurs in the same customer’s account every month may be a systematic billing error worth fixing. Even below-threshold items should be documented so an auditor can review them.

Fixing the Differences You Find

Adjusting Journal Entries

When you find a data-entry error or a transaction posted to the wrong account, the fix is an adjusting journal entry that brings the general ledger into line with the verified sub-ledger. Every adjustment should carry a written explanation and copies of the source documents (invoice, payment receipt, bank record) showing why the change was made. That trail protects you in an audit and lets anyone reviewing the books later understand what happened.

Credit Memos for Returns and Disputes

When a customer returns product or disputes a charge, issue a credit memo. The memo formally reduces what’s owed and serves as evidence that the business has waived its right to collect that portion of the original invoice. Recording it in the sub-ledger drops the customer’s balance without erasing the original transaction, which matters because auditors need the full trail: what was billed, what was contested, how it resolved.

Writing Off Uncollectible Balances

Sometimes a customer will not or cannot pay. Under generally accepted accounting principles (GAAP), public companies and most accrual-basis businesses use the allowance method: they estimate total receivables likely to go uncollectible and carry an “allowance for doubtful accounts” that offsets AR on the balance sheet. When a specific account is confirmed uncollectible (bankruptcy, for example), it’s charged against the allowance rather than booked as a sudden expense.

The alternative, the direct write-off method, records bad debt expense only when a specific account is deemed worthless. It’s simpler but doesn’t comply with GAAP’s matching principle, because the expense hits a different period than the revenue it relates to. Small businesses outside GAAP sometimes use it for that simplicity, at the cost of overstating receivables until the write-off happens.

Tax Treatment of Bad Debt Write-Offs

Writing off a balance in your books does not by itself produce a tax deduction. The IRS allows a business bad debt deduction only if the uncollectible amount was previously included in your gross income.¹ In practice that limits the deduction to accrual-basis businesses, which report income when they invoice the customer, before cash arrives. Cash-basis businesses never reported the income, so there’s nothing to deduct when the customer stops paying.²

For accrual-basis businesses, the IRS requires proof the debt is genuinely worthless: reasonable collection efforts and no realistic expectation of payment. A court judgment isn’t required, but documentation of the collection attempts is. Partly worthless debts can be deducted in the year you charge them off on your books; totally worthless debts, in the year they become completely uncollectible.² Keep the supporting records for at least seven years if you claim a deduction for worthless securities or bad debts.³

Controls That Catch Fraud During Reconciliation

Reconciliation catches honest mistakes, but it also catches fraud. “Lapping” is a scheme where an employee handling incoming payments pockets a customer’s check and covers the shortage with the next customer’s payment applied to the first customer’s account. The theft rolls forward, each stolen payment concealed by a later one. Warning signs include delays in posting customer payments, rising billing complaints, sub-ledger balances that keep diverging from the general ledger, and a pattern of increasing write-offs.

The strongest prevention is segregation of duties. The person who opens the mail and handles checks should not be the same person who posts payments to customer accounts or performs the reconciliation. When one employee controls all three, no independent check exists. In smaller businesses where full separation isn’t practical, compensating controls help: the owner or a manager reviews the reconciliation, opens the bank statement independently, or sends confirmation letters directly to customers.

Customer Balance Confirmations

Sending letters to customers asking them to confirm the balance your records show is a powerful reconciliation tool. It’s a standard audit procedure established by the Public Company Accounting Oversight Board, which requires auditors to consider using external confirmations to verify AR.⁴ You don’t need to be a public company or under audit to use it. Periodic confirmations on your largest and oldest balances surface discrepancies internal records can’t — a customer who believes they already paid, or who disputes the amount owed.

Customer Credit Balances and Unclaimed Property

Reconciliation often surfaces customer credit balances: overpayments, duplicate payments, unapplied credits. These aren’t just bookkeeping oddities. Every state has unclaimed property (escheatment) laws requiring businesses to turn dormant financial assets over to the state when the owner can’t be located after a specified period. For most property types the dormancy period runs three to five years, though some states have shortened it to as little as one year for certain categories, and the recent trend has been toward shorter periods.

When old customer credits turn up, try to reach the customer and return the funds, and document the outreach. If contact fails and the dormancy period passes, the property has to be reported and remitted to the state. Ignoring the obligation exposes you to penalties and interest, and many states actively audit for compliance.

How Long to Keep the Records

The reconciliation is only as useful as the documentation behind it. The IRS requires records supporting items on your tax return to be kept until the period of limitations expires, generally three years from the filing date.³ Several situations extend that period:

Six years if you underreport income by more than 25 percent of the gross income shown on your return
Seven years if you claim a deduction for bad debts or worthless securities
Indefinitely if you don’t file a return or file a fraudulent one
Four years for employment tax records, measured from when the tax is due or paid, whichever is later

For AR specifically, hold on to invoices, cash receipt records, credit memos, aging reports, completed reconciliation worksheets, and adjusting journal entries with their explanations. The seven-year period tied to bad debt deductions is the longest most businesses will encounter, so keeping AR records for at least seven years is a practical default.³

1
Internal Revenue Service. Topic No. 453, Bad Debt Deduction
2
Internal Revenue Service. Publication 334, Tax Guide for Small Business
3
Internal Revenue Service. How Long Should I Keep Records?
4
Public Company Accounting Oversight Board. AS 2310: The Auditors Use of Confirmation