Definition of 'Reconciliation'
An accounting process used to compare two sets of records to ensure the figures are in agreement and are accurate. Reconciliation is the key process used to determine whether the money leaving an account matches the amount spent, ensuring the two values are balanced at the end of the recording period.
Investopedia explains 'Reconciliation'
At the end of every month, it is a good idea to reconcile your checkbook and credit card accounts by comparing your check copies, debit card receipts and credit card receipts with your bank and credit card statements. This type of account reconciliation makes it possible to determine whether money is being fraudulently withdrawn from an account, ensures that financial institutions have not made any errors impacting your accounts, gives you an overall picture of your spending, helps you assess whether you’re overspending and shows whether you’re spending too much on banking and credit card fees. When an account is reconciled, the statement’s transactions and ending balance should match the account holder’s records. For a checking account, it is also important to know how any pending deposits or checks outstanding affect the statement balance—that is, how much money you really have available to spend.
Account reconciliation is important not just for individuals and households, but also for businesses. Businesses must reconcile their accounts to check for fraud and to prevent balance sheet errors. Businesses typically use accounting software to help them perform account reconciliations. For publicly traded companies in particular, mistakes can have serious ramifications. An auditor who reviews the company’s financial statements in accordance with federal regulations such as Sarbanes Oxley could find a material error, which the company would have to publicly disclose as a failure of controls, a material misstatement and/or a material weakness. And without accurate financial information, a company cannot make well-informed decisions.