A reconciliation statement is a document that begins with a company's own record of an account balance, adds and subtracts reconciling items in a set of additional columns, and then uses these adjustments to arrive at the record of the same account held by a third party. The intent of the reconciliation statement is to provide an independent verification of the veracity of the balance in the company account, as well as to clarify the differences between the two versions of the account.
The differences between the two accounts are detailed in the reconciliation statement, which makes it easier to determine which of the reconciling items may be invalid and in need of adjustment. Reconciliation statements are an extremely useful tool for both internal and external auditors. External auditors will likely want to use internally-prepared reconcilation statements as part of their auditing procedures, since the statements allow them to focus on reconciling items, especially in large-balance accounts that are materially significant components of the financial statements.
Reconciliation statements are commonly constructed in the following situations:
- Bank accounts. The bank reconciliation compares the balances between a company's version of its cash balance and the bank's version, typically with many reconciling items for such items as deposits in transit and uncashed checks.
- Debt accounts. The debt reconciliation compares the debt amounts outstanding according to the company and its lender. There can be differences requiring reconciliation when the company pays the lender, and the lender has not yet recorded the payment in its books.
- Accounts receivable. The receivables reconciliation is usually constructed on an informal basis for individual customers, and compares their version of outstanding receivable balances to the company's version.
- Accounts payable. The payables reconciliation is also usually constructed on an informal basis by individual supplier, and compares their version of outstanding payable balances to the company's version.
At a minimum, reconciliation statements are useful for noting timing differences in when the same transaction is recorded by both parties to a transaction. The statements are even more useful for clarifying substantial differences between the amounts recorded for a transaction, which may require adjustments by either party to modify their recorded balances.