Business, Legal & Accounting Glossary
The reviewing and adjusting of the balance in a personal chequebook to match your bank statement.
Reconciliation is the process of comparing and matching general ledger entrys for two sets of corresponding records. It is an important accounting process which translates into accurate financial reporting and government filings.
Account reconciliation is a banking term referring to the process of confirming that the balance in one’s checkbook matches the balance on the bank statement itself. Account reconciliation may reveal that the amounts don’t correspond, which will require the account holder to perform subsequent adjustments. The importance of account reconciliation is that it helps the account holder keep track of the money, which could prevent expensive inefficient funds fees. There are several steps and precautions one can take when engaging in account reconciliation. Account reconciliation might entail keeping good records and carefully inspecting the bank statement itself. Account reconciliation can be used by both individuals and companies. In the business sense, account reconciliation is a method that can be used to help with cash management and help protect the business against fraudulent activities (such as the posting of unauthorized checks).
Account reconciliation refers to the steps taken to demonstrate that an account balance is correct. The concept is most commonly associated with bank reconciliation, in which a company’s recorded cash balance is compared to the bank’s end-of-month bank statement and adjustments are made as needed to match the two balances. It is also an important task to complete prior to an organization’s books being audited at the end of each year.
Account reconciliations should be performed on a regular basis to ensure that the account balances shown on a company’s balance sheet are correct. If not, many asset accounts are likely to be overstated, requiring a company to charge off significant amounts at year-end to more accurately align these accounts with reality.
Account reconciliation is especially important for bank accounts because it is possible to mistakenly believe that a cash balance is higher than it is. When this occurs, businesses are more likely to issue check payments only to discover that they have overdrawn their accounts, resulting in overdraft fees or bounced checks.
Account reconciliations can also be used to identify instances of inappropriate purchases. Once identified, management can put controls in place to reduce the likelihood that these expenditures will be repeated.
A company controller wishes to reconcile all balance sheet accounts at the end of the fiscal year in order to justify their ending balances to the auditors. This entails gathering documentary evidence pertaining to the amounts stated in each account. For example, she compares the total in the payables detail report to the ending balance in the trade payables account; this means she can provide the auditors with a copy of the payables report as proof that the ending balance in the trade payables account is correct.
As another example, the controller keeps a list of the prepaid expenditures recorded in the prepaid expenses asset account and updates it at the end of each month to reflect any additions to the account as well as deductions for items in the account that have been charged to expense.
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This glossary post was last updated: 13th April, 2022 | 0 Views.