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.
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:
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.
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