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What is Reconciliation?


The term 'Reconciliation' is included in the Accounting edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

Reconciliation refers to an accounting process. Its chief defining characteristic is that is employs two different records in order to make sure that the figures it portrays are both identical and accurate. This critical process ensures that money going out of an account measures accurately against the amount actually spent. In other words, it assures accountants that the two values will be in balance once the recording period concludes.

While no universally accepted standard exists for Reconciliation accounting, the GAAP generally accepted accounting principles prefer account conversion and double entry accounting for the primary best methods of reconciling. Individuals or companies may elect to reconcile their important records on an annual, monthly, or daily basis with either methodology.

It always helps to demystify a complex topic with real world examples. Julian like many consumers opts to reconcile his check book and credit card accounts at the conclusion of each month. He does this by comparing debit card receipts, cancelled checks, and credit card receipts along with the statements from the bank and credit card companies. It allows for Julian to determine if money is being withdrawn fraudulently or illegally. Besides this, it provides him with confidence that no bank errors have been made on any of his accounts at the various financial institutions. Julian finally benefits from a big picture view of his spending habits and patterns each month this way.

As accounts become reconciled, the ending balance should match up exactly with the transactions as noted on the statements for the month and also with the records of Julian or other account holders. Where checking accounts are involved, individuals must also be concerned with outstanding checks or pending deposits and the impact these will create on the real world balance as well as the statement balance.

Companies are also critically concerned with the processes of Reconciliation of their accounts. Corporations have to reconcile all accounts in order to make sure there are no errors on the balance sheets or that no fraud has occurred within the company at large. Larger firms and smaller ones alike will generally deploy one of several good accounting programs to take care of these internal processes. This is because there will be no computational errors when utilizing these programs. They prevent mistakes that can create major consequences for companies which are publically traded.

As an example of the usefulness of such Reconciliation, auditors will commonly do a final review of corporations’ financial statements as the Sarbanes-Oxley Act and other federal regulations require. They might come across a significant error in this review. The firm would then be forced to publicly disclose this failure of internal controls. Otherwise it might have to declare it a material weakness or material misstatement. This is all critical since corporations cannot be expected to engage in intelligent decision making processes if they cannot rely on their own internal financial information.

With double entry accounting, the accountants will post each and every financial transaction according to a two-column entry on the balance sheet of the firm. When companies draw on a $50,000 longer-term loan, their accountants will credit the longer term debt category and also notate the payable columns with the $50,000 amount. They will simultaneously debit the cash column by the identical amount. The important rule is that as the amounts are all tallied together, they must reconcile to an even zero final amount.

If businesses acquire an invoice for repainting of their office building, they will then credit the invoice amount under the column for accounts payable while debiting the column for painting and other office expenses by the identical amount. As the firm pays its bill, the accountants will then debit the accounts payable while simultaneously crediting the column for office painting.

The term 'Reconciliation' is included in the Accounting edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.