Reconciliation

A reconciliation involves matching two sets of records to see if there are any differences. Reconciliations are a useful step in ensuring that accounting records are accurate. Examples of reconciliations are:

  • Comparing a bank statement to the internal record of cash receipts and disbursements
  • Comparing a receivable statement to a customer's record of invoices outstanding
  • Comparing a supplier statement to a company's record of bills outstanding

A reconciliation can uncover bookkeeping errors and possibly fraudulent transactions. An outcome of this examination is that adjusting entries are made to the accounting records, to bring them into line with the supporting evidence.

The reconciliation process usually occurs at the end of each reporting period. As part of the closing process, the accounting staff may engage in the following reconciliation activities:

  • Reconcile the bank statement
  • Reconcile balance sheet accounts to the supporting detail
  • Reconcile inventory records to on-hand balances (if a periodic inventory system is used)

Reconciliations are considered an important control activity. If they are not performed, the probability that an auditor will find errors will increase, which could trigger a judgment that a business has a material control weakness.