Reconciliation in Account Definition, Purpose, and Types
A procedure used in accounting called reconciliation examines two sets of records to ensure that the figures are correct and consistent. The general ledger's accounts' consistency, correctness, and completeness are also confirmed by reconciliation. Reconciliation can, however, be employed for personal objectives in addition to professional ones.
Account reconciliation is useful in explaining the difference between financial records and account balances. Some deviations may be permitted due to the fact that payments and deposits are made at various times. Unexpected or inexplicable discrepancies, however, might be an indication of fraud or accounting fraud. Both corporations and individuals can carry out accounting reconciliations on a daily, monthly, or annual basis in order to filter such transactions.
Account reconciliation cannot be carried out consistently using any standard method. However, generally accepted accounting principles (GAAP) demand double-entry accounting, which records a transaction twice in the general ledger and is the most popular reconciliation technique.
Double-entry accounting's ability to discover errors on both sides of the input makes account reconciliation useful. According to the double-entry accounting approach, which enterprises often use, each financial transaction is recorded in two accounts, the credit account and the debit account.
One account will be debited, while the other will be credited. For instance, a business might credit sales income and debit cash or accounts receivable when it makes a sale (on the balance sheet).
Consider the scenario in that Mary started a lawn-mowing company. Mary utilizes her business's $2,000 in funds as startup money. She buys a lawnmower with it. She then uses the lawnmower to perform her first task: mowing the grass. She earns $500 by completing this task.
She debuts her assets, which include the lawnmower, by the same amount of $2,000 and credits cash for the same amount. She records $500 as income for her first job and debits the same amount for accounts receivable. Her credits and debits have been balanced and are equal. In this scenario, the ledger, after reconciliation, will look like this:
Reconciling a Ledger
Particular Considerations: Primary Purpose
Reconciliation is mainly a useful approach to recording a double-entry journal entry that solely impacts the balance sheet. For instance, if a business took out a long-term loan for $10,000, the accountant would credit the long-term debt account and debit the cash account, which is an asset on the balance sheet.
When a business receives an invoice, the funds are credited to accounts payable instead of being deducted from an expense (on the income statement). When the business pays the invoice, it debits accounts payable and credits the cash account. For a general ledger transaction, each journal entry's left (debit) and right (credit) sides should balance out to zero.
Different Forms/ Types of Reconciliation
Many people frequently balance their chequebooks and credit card accounts by comparing their written checks, debit card receipts, and credit card receipts with their bank and credit card statements. It is easy to identify whether money is being fraudulently withheld while performing this kind of account reconciliation.
By reconciling their accounts, people may make sure that financial institutions (FI) have not made any mistakes in their accounts and receive a basic understanding of their expenditures. When an account is reconciled, the transactions on the statement and the account holder's data should match. Any delayed deposits or unpaid checks for a checking account must be considered accordingly.
To avoid unfavorable audit findings, check for fraud, and eliminate balance sheet problems, businesses must reconcile their accounts properly. Companies typically reconcile their balance sheets once a month, following the closing of their books for the previous month. This type of account reconciliation requires examining all balance sheet accounts to confirm that transactions were correctly recorded in the relevant general ledger account. In the event that journal entries were booked improperly, adjustments may be required.
There must be some reconciliation to ensure that the cash inflows and outflows between the income statement, balance sheet, and cash flow statement correspond. Even if the direct method of reporting the cash flow statement is used, the corporation is still required by GAAP to reconcile cash flows to the income statement and balance sheet.
If the indirect method is used, the cash flow from the operations section must already contain the reconciliation of the three financial statements. Other reconciliations translate non-GAAP measures into comparable, accepted-by-GAAP counterparts, such as earnings before interest, taxes, depreciation, and amortization (EBITDA).
What does Accounting Reconciliation mean?
An accounting process known as reconciliation tries to confirm the precision and uniformity of the data in two sets of records, usually internal and external. This is done to check whether the credits and debits are equal or not.
What justifies Account Reconciliation?
Reconciling the accounts is essential since it helps you identify any mistakes, discrepancies, or fraud in your accounting records that might have a detrimental impact on the financial health of your business. Reconciliation is a successful business strategy that can help a firm be successful.
What is involved in the accounting reconciliation process?
In general, reconciliation entails comparing your internal accounts to your external accounts, which includes verifying payments and deposits, reviewing bank statements for all cash inflows and outflows, noting charges for which you have no supporting documentation, and ensuring all debits match with credits and vice versa.
Example of Reconciliation in Accounting
Reconciliation, as an example, involves buying certain assets for a business that makes money and making sure that the acquisition appropriately reflects on both the balance sheet and the income statement. For the money used to make the purchases, a credit would be made to the cash account, and a debit would be made to the asset account.