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.
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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
When account reconciliations are incorporated into the month-end closing process, this can delay the completion of the close. Controllers can mitigate this issue by mandating that only accounts with large ending balances be reconciled at the end of each month, thereby reducing the workload while still spotting most account errors.