What is 'Reconciliation'
Reconciliation is an accounting process that uses two sets of records to ensure figures are accurate and in agreement. 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.
BREAKING DOWN 'Reconciliation'There is no standard method of accounting reconciliation, but generally accepted accounting principles (GAAP) consider double-entry accounting and account conversion to be the main forms of reconciliation, and businesses and individuals may reconcile their records daily, monthly or annually using either of these methods.
Reconciliation in Personal Accounting
At the end of every month, many individuals reconcile their checkbooks and credit card accounts by comparing their canceled checks, debit card receipts and credit card receipts with their bank and credit card statements. This type of account reconciliation makes it possible to determine whether money is being fraudulently withdrawn. It also ensures that financial institutions have not made any errors with individuals' accounts, and it gives individual consumers an overall picture of their spending.
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.
Reconciliation in Business Accounting
Account reconciliation is also important 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. Mistakes can have serious ramifications for publicly traded companies. For example, an auditor who reviews the company’s financial statements in accordance with federal regulations such as the Sarbanes-Oxley Act 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. Without accurate financial information, a company cannot make well-informed decisions.
Difference Between Double-Entry Reconciliation and Account Conversion
In double-entry accounting, an accountant posts every financial transaction in two columns of a business's balance sheet. For example, if the business takes out a long-term loan for $10,000, the accountant credits long-term debt or notes payable with that amount and debits the cash column with the same amount. When these amounts are added together, the account reconciles or balances at 0.
Similarly, imagine that a business incurs an invoice for carpet cleaning services. It credits the amount of the invoice in its accounts payable column, and it debits its column devoted to office cleaning and similar expenses for the same amount. When the company pays the bill, it debits accounts payable and credits the office cleaning column.
Under the account conversion method, businesses or individuals compare records such as receipts or canceled checks with the entries in its ledger.