Reconciliation definition
/What is a Reconciliation in Accounting?
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. If a difference is found during a reconciliation, it may be caused by a timing issue, where documentation has been recorded in one of the accounting records, but not the other. Another possibility is that the difference is caused by the fraudulent manipulation of accounting records.
Examples of Reconciliations
Examples of reconciliations are as follows:
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
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.
Advantages of a Reconciliation
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. This tends to result in fewer audit adjustments at the end of the year, since most issues have already been found and corrected by the accounting staff.
Disadvantages of a Reconciliation
Reconciliations are essential accounting controls, but they also impose administrative costs and limitations. Their effectiveness depends heavily on timely preparation, accurate supporting records, and competent review, as noted next:
Time and labor requirements. Reconciliations can require substantial staff time, especially when transaction volumes are high or discrepancies are numerous. Frequent reconciliations can increase accounting department workload and administrative cost.
Dependence on accurate source data. A reconciliation cannot reliably identify problems when both sets of records contain the same error or when supporting documentation is incomplete. Incorrect source data can therefore create a false impression that an account balance is accurate.
Delayed detection of problems. Periodic reconciliations often identify errors only after transactions have already been processed. Delayed detection can allow recording mistakes, control weaknesses, or fraudulent activity to continue before management investigates and corrects them.
Reconciliation FAQs
What is the difference between a bank reconciliation and a general ledger reconciliation?
A bank reconciliation compares the company’s cash records with the bank statement, identifying deposits in transit, outstanding checks, fees, and errors. A general ledger reconciliation compares an account balance with supporting records or subsidiary ledgers to verify accuracy, completeness, and proper recording of transactions.