What is reconciliation, why is it significant, and when does it occur?

Reconciliation, in accounting, is the process of ensuring that two sets of balances/accounts are in agreement and are accurate. It is a critical step in the accounting cycle for confirming the reliability of an organization's  accounting records and ensuring the organizations abides by GAAP (generally accepted accounting principles). Account reconciliation is necessary for all asset, liability, and equity accounts since the balances of these accounts are carried forward every fiscal year. During the process of reconciliation, it is typical of accountants and bookkeepers to compare an external statement- for instance a bank statement- against an internal record-keeping account. Another method to carry out reconciliation is analytics review, in which accounts are reconciled using estimates of historical account activity level. Today the process of reconciliation can be automated and carried out quickly through using accounting software, thus reducing potential human error and  increasing efficiency.  

Why is it important?

As mentioned earlier, reconciliation is an essential step in the accounting cycle to ensure accounting records are correct and reliable. Additional reasons as to why reconciliation is important are:

• It helps identify fraud and theft. Companies that regularly reconcile their accounts are quicker to identify irregular or fraudulent activities and this in turn allows them to react quicker to avoid  unnecessary losses.
• It validates data entry. Reconciling allows for the identification of irregularities within accounting records. This prevents errors from going unnoticed and ensures the accuracy of financial statements.
• It ensures accurate tax reporting. In order to generate a correct tax return, the reconciliation of bank statements is a must.
• It helps monitor and manage cash flows.
• SOX requires public companies to have internal controls to prevent material misstatement. Reconciliation is one form of internal control that is highly encouraged.  

When does reconciliation occur and how often should it occur?

Reconciliation typically occurs during the end of the accounting cycle. The best practice is to reconcile accounts at the end of every month and fiscal year. It is convenient to reconcile the books at the end of each month because banks send monthly statements that can be used as a basis for the reconciliation. For higher volume companies who face greater risk, daily reconciliations are recommended.  If there are accounts that do not need to be reconciled on regular basis, they should be closed with any transactions transferred to active accounts. By reconciling on a regular basis, this makes year end reconciliation a much easier process allowing companies to report statements and taxes in a timely matter.

References:

https://corporatefinanceinstitute.com/resources/knowledge/accounting/reconciling-account/

HTH & Accounting Associates help organizations and business owners with accounting and/or financial consulting services.  

For Help with the reconciliation process contact us at accounting@thaddeus.org or call us at 909-599-2111.  

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