Reconciliation (accounting)

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In accounting, reconciliation is the process of ensuring that two sets of records (usually the balances of two accounts) are in agreement. It is a general practice for businesses to create their balance sheet at the end of the financial year as it denotes the state of finances for that period. Reconciliation is used to ensure that the money leaving an account matches the actual money spent. This is done by making sure the balances match at the end of a particular accounting period. [1]

Contents

Definition

The following two definitions are given by the Oxford Dictionary of Accounting.

i) “A procedure for confirming that the balance in a chequebook matches the corresponding bank statement. This is normally done by preparing a bank reconciliation statement. [2]

ii) A procedure for confirming the reliability of a company's accounting records by regularly comparing [balances of transactions]. An account reconciliation may be prepared on a daily, monthly, or annual basis.” [2]

The generally accepted accounting principles (GAAP) are a set of accounting principles, procedures and standards that organisations use in order to compile their financial statements. GAAP states that the purpose of account reconciliation is to provide accuracy and consistency in financial accounts. To ensure all cash outlays and inlays match between cashflow statements and income statements it is necessary to carry out reconciliation accounts. [3]

Reconciliation is a process that may benefit businesses as this may help avoid balance sheet errors which may have led to detrimental ramifications; in addition, reconciliation may help against fraud and can help instill financial integrity.

Accounting software is one of a number of tools that organizations use to carry out this process thus eliminating errors and therefore making accurate decisions based on the financial information. Reconciliation of accounts determines whether transactions are in the correct place or should be shifted into a different account.

Reconciliation in accounting is not only important for businesses, but may also be convenient for households and individuals. It is prudent to reconcile credit card accounts and checkbooks on a regular basis, for example. This is done by comparing debit card receipts or check copies with a person's bank statements.

Benefits of reconciling:

Account reconciliation is an important internal control in the financial reporting process. Public companies are required to perform these steps as a part of their financial close. [4]

Methods

To ensure the reliability of the financial records, reconciliations must, therefore, be performed for all balance sheet accounts on a regular and ongoing basis. A robust reconciliation process improves the accuracy of the financial reporting function and allows the finance department to publish financial reports with confidence. [5]

There are two ways in which reconciliation can take place:

  1. Using a documentation review, “Document review is a formalised technique of data collection involving the examination of existing records or documents.” [6] This is the most common approach of account reconciliation. This method is done by using accounting software.
  2. The second method used is analytics review. “Any process by which a person or company looks at an account or financial statement and attempts to identify any irregularities. This may involve comparing financial and non-financial information.” [7] Reconciliation of accounts using this method is undertaken by estimating the transactions that should be in an account, usually based on other data, for example historical activity. [8]

In both cases where mistakes are identified as a result of the reconciliation, adjustments should be undertaken in order for the account balance to match the supporting information.

Current practice

Currently there are no specific account standards for accountancy reconciliation per se. However, there are different rules for balancing many types of accounts. There are no specific regulations mentioned by IAS, ICAW and HMRC. GAAP provide different rules in regards to reconciliation to balance different types of accounts. According to GAAP, account reconciliation is a process that is performed through account conversion or double-entry accounting. [9]

Manual reconciliation to automation

In the United States, the passage in 2002 of the Sarbanes–Oxley Act (SOX) has emphasized the need for balance sheet account reconciliation to be included within a company's own procedures, not relying only on external auditors. [10] The legislation was enacted “to protect shareholders and general public from accounting errors and fraudulent practices in the enterprise, as well as improve the accuracy of corporate disclosures.” [11] SOX and other similar acts across the world have increased stress on organisations to comply. As a result, the accounting industry has sought ways to automate a previously strenuous manual process. The pressure of SOX is coupled with the perennial need to mitigate erroneous reconciliation in the process.

By using available information technology, organizations can more easily automate their reconciliation and for each financial close cycle less manual labour would be required. As late as 2012, 90% of companies still reconciled manually, using Microsoft Excel spreadsheets. [12] This process is arduous allowing for further human error. Automating reconciliation can significantly reduce aforementioned errors and increase efficiency. Further benefits of automated reconciliation include centralised control, improved monitoring, reduced operational costs, increased productivity and efficiency, improved accessibility, improved data security and reduced audit risks and costs. [13] [14]

See also

Related Research Articles

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Accounting, also known as accountancy, is the process of recording and processing information about economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activities and conveys this information to a variety of stakeholders, including investors, creditors, management, and regulators. Practitioners of accounting are known as accountants. The terms "accounting" and "financial reporting" are often used interchangeably.

<span class="mw-page-title-main">Sarbanes–Oxley Act</span> 2002 U.S. law regarding corporate accounting

The Sarbanes–Oxley Act of 2002 is a United States federal law that mandates certain practices in financial record keeping and reporting for corporations. The act, Pub. L.Tooltip Public Law  107–204 (text)(PDF), 116 Stat. 745, enacted July 30, 2002, also known as the "Public Company Accounting Reform and Investor Protection Act" and "Corporate and Auditing Accountability, Responsibility, and Transparency Act" and more commonly called Sarbanes–Oxley, SOX or Sarbox, contains eleven sections that place requirements on all U.S. public company boards of directors and management and public accounting firms. A number of provisions of the Act also apply to privately held companies, such as the willful destruction of evidence to impede a federal investigation.

<span class="mw-page-title-main">Financial statement</span> Formal record of the financial activities and position of a business, person, or other entity

Financial statements are formal records of the financial activities and position of a business, person, or other entity.

<span class="mw-page-title-main">Balance sheet</span> Accounting financial summary

In financial accounting, a balance sheet is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business partnership, a corporation, private limited company or other organization such as government or not-for-profit entity. assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". It is the summary of each and every financial statement of an organization.

<span class="mw-page-title-main">Financial audit</span> Type of audio

A financial audit is conducted to provide an opinion whether "financial statements" are stated in accordance with specified criteria. Normally, the criteria are international accounting standards, although auditors may conduct audits of financial statements prepared using the cash basis or some other basis of accounting appropriate for the organization. In providing an opinion whether financial statements are fairly stated in accordance with accounting standards, the auditor gathers evidence to determine whether the statements contain material errors or other misstatements.

<span class="mw-page-title-main">Financial accounting</span> Field of accounting

Financial accounting is a branch of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders are examples of people interested in receiving such information for decision making purposes.

<span class="mw-page-title-main">Cash and cash equivalents</span> Highly liquid, short-term assets

Cash and cash equivalents (CCE) are the most liquid current assets found on a business's balance sheet. Cash equivalents are short-term commitments "with temporarily idle cash and easily convertible into a known cash amount". An investment normally counts as a cash equivalent when it has a short maturity period of 90 days or less, and can be included in the cash and cash equivalents balance from the date of acquisition when it carries an insignificant risk of changes in the asset value. If it has a maturity of more than 90 days, it is not considered a cash equivalent. Equity investments mostly are excluded from cash equivalents, unless they are essentially cash equivalents.

<span class="mw-page-title-main">Auditor's report</span> Type of written document

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<span class="mw-page-title-main">Statement of changes in equity</span>

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References

  1. ↑ Jean Scheid, "Understanding Balance Sheet Account Reconciliation", Bright Hub, 8 April 2011
  2. 1 2 Owen, G. and Law, J. (2005). A dictionary of accounting. Oxford: Oxford University Press.
  3. ↑ Investopedia, (2003). Generally Accepted Accounting Principles (GAAP) Definition | Investopedia. [online] Available at: http://www.investopedia.com/terms/g/gaap.asp#ixzz3qTbiuFxO [Accessed 3 Nov. 2015].
  4. ↑ "What Are Account Reconciliations?". BlackLine Magazine. 2017-11-02. Retrieved 2019-02-07.
  5. ↑ "Intercompany Reconciliations", Instant Controller, 27 December 2010
  6. ↑ Ventureline.com, (2015). DOCUMENT REVIEW DEFINITION. [online] Available at: https://www.ventureline.com/accounting-glossary/D/document-review-definition/ (Accessed 3 Nov. 2015)
  7. ↑ TheFreeDictionary.com (2015). Analytical Review. Online [Available at: http://financial-dictionary.thefreedictionary.com/Analytical+Review] (Accessed 4 Nov. 2015)
  8. ↑ Bragg, S. (2013). How do I reconcile an account? - Questions & Answers - AccountingTools. [online] Accountingtools.com. Available at: http://www.accountingtools.com/questions-and-answers/how-do-i-reconcile-an-account.html [Accessed 3 Nov. 2015].
  9. ↑ Investopedia, (2015). How is reconciliation treated under generally accepted accounting principles (GAAP)?. Available at: (Accessed 4 Nov. 2015)
  10. ↑ James Brady Vorhies, "Account Reconciliation: An Under appreciated Control", Journal of Accountancy, 1 September 2006
  11. ↑ M. Rouse, (2015). What is Sarbanes-Oxley Act (SOX)? - Definition from What Is.com. [online] Archdiocese. Available at: http://searchcio.techtarget.com/definition/Sarbanes-Oxley-Act [Accessed 2 Nov. 2015]
  12. ↑ M. Spanicciati, ‘How automating balance sheet account reconciliation can lead to a real return on investment’, Financial Management (Sep. 2013), p. 57
  13. ↑ "reconciliation-solution-enhance-the-reconciliation-process". Indus Valley Partners Corporation. Indus Valley Partners Corporation. Retrieved 7 July 2022.
  14. ↑ "Automating Financial Reconciliation Process Through RPA". NuAIg. 2021-04-30. Retrieved 2021-09-09.
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