Reconciliation is an accounting process carried out by businesses in which they compare two data sets and ensure that they match. To carry out this task, businesses usually compare their own data records to external data received through a bank, a customer, or a vendor. In the process, each value on a specific date is then matched to see both agree.
It allows businesses to prove their accounting balance and transactions are correct. In the corporate world, businesses need to know whether their accounting balances are correct so that these balances can be made useful for future financial prospects and to be able to view the realistic financial picture of the company.
Reconciliation is an important process for businesses because it helps them make sure that their transactions are recorded correctly and accurately. The process allows businesses to gain confidence that they have recorded the correct data within their accounts.
To meet this purpose, businesses usually reconcile accounts at the end of each accounting period. Period reconciliations are important to be carried out to find out any discrepancies in the accounting record and to be able to correct them regularly. It allows businesses to ensure their accounting records are maintained in the most accurate form without any errors and discrepancies.
Types of Reconciliations
All businesses carry various types of reconciliations aimed at ensuring correct balances of various accounts. Among these, five of the most common types of reconciliations are usually conducted by each business, whether small or large. These reconciliations include the following:
1) Bank Reconciliation Statement
This form of reconciliation helps identify any errors or inaccuracies in the business bank records maintained in the business’ accounting books. This is done by verifying that the bank’s balance shown in the business books is the same as shown by the bank for the business account.
The business must match each transaction recorded in its books (usually done in cash or bank account) to the relevant transaction record in the bank statement and ensure that the correct amount is recorded.
It helps businesses by reconciling their cash position to match with what is provided by the bank. The most common type of errors that arise in matching bank statements and business cash accounts are:
- Cheques that were issued by the business and recorded in business books but have not been presented in the bank yet.
- Cheques that were deposited in the bank but have not been cleared and credited to the account yet by the bank
- Dishonored cheques
- Any direct debits, fees or penalties that have been paid from the business bank but have not been recorded by the business yet.
- Any amounts or transactions recorded in error by the business or the bank.
By highlighting and finding out these errors, businesses can ensure that their records show a bank balance that is at par with the actual bank balance held in the business account at the bank. Further, this also allows the business to identify any unusual transaction or any fraud or theft.
Therefore, businesses must conduct bank reconciliations regularly, depending upon the size of the business and the number of transactions. It can also help businesses keep a record of their accounts payables and accounts receivables and help them to be able to forecast their cash flow accurately.
Thus, such reconciliation of bank statements can be carried out on a weekly, monthly, bi-annual or annual basis as desired by the business or deemed necessary by it.
2) Vendor reconciliation
As the name implies, this reconciliation is done to match the business records with those supplied by the vendor or supplier of the business. This type of reconciliation is done to match the balances of Accounts Payable by checking the amounts recorded against each transaction with the records or statements supplied by the vendor.
The vendor often does not automatically provide such statements at the end of each period so that businesses might request them. This allows businesses to ensure they can keep track of their payables correctly.
3) Customer Reconciliation
Customer reconciliation is also known as accounts receivable reconciliation. This type of reconciliation is used by businesses to reconcile the balances of bills and invoices of customers, which are yet to be paid by the customers and hence yet to be received by the business. These bills and invoices are matched to the individual balances owed by each customer against each invoice and then the overall balance of accounts receivable. It helps keep a proper track of outstanding amounts owed by the customers and further helps the business correct any errors or inaccuracies in customer accounts before the financial statements are published.
4) Intercompany Reconciliations
Parent companies carry out this type of reconciliation for their subsidiaries. It allows parent companies to consolidate the general ledgers of all their subsidiaries and identify and eliminate any intercompany flows that might arise in loans, deposits, and invoicing transactions.
Any increases in the assets, expenses, incomes, or liabilities of the group companies can be normalized, which may arise as a part of the intercompany flow. Ensure accurate accounts are maintained company-wide across the network of companies as it helps them publish accurate consolidated financial statements for the entire company.
This type of reconciliation also helps minimize currency and financial costs and helps reduce bank transaction fees and optimize the company’s liquidity. Any errors and discrepancies found can be corrected to ensure that the company’s consolidated financial statements are accurate and represent the correct financial picture. If any transaction has been missed in the records of either of the companies, that can be recorded too.
5) Business specific Reconciliation
This type of reconciliation is specific to the needs of each business. This means that the business can conduct the relevant reconciliation based on its needs and type of business. For example, a goods manufacturing company will need to do a stock or inventory check to ensure that the inventory balances are correctly recorded in company accounts. This inventory check can be done manually.