Reconciliation (accounting): Difference between revisions
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{{Short description|Accounting term}} |
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{{Other uses|Reconciliation (disambiguation){{!}}Reconciliation}} |
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{{More citations needed|date=July 2008}} |
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{{Accounting}} |
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| ⚫ | In [[accounting]], '''reconciliation''' |
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| ⚫ | In [[accounting]], '''reconciliation''' is the process of ensuring that two sets of records (usually the [[Balance (accounting)|balances]] of two [[Account (accountancy)|account]]s) are in agreement. It is a general practice for businesses to create their [[balance sheet]] at the end of the financial year as it denotes the state of finances for that period. Reconciliation is used to ensure that the money leaving an account matches the actual money spent. This is done by making sure the balances match at the end of a particular accounting period.<ref>Jean Scheid, [http://www.brighthub.com/office/finance/articles/69349.aspx "Understanding Balance Sheet Account Reconciliation"], Bright Hub, 8 April 2011</ref> |
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Well reconciliations refers to two sets of records (what is being put in the well compared to what actual costs are being spent). Each account is given a work breakdown structure number (WBS) that will determine the cost of the well. The two numbers are compared to assure that they balance at the end of the accounting cycle. There is usually a difference. |
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== Definition == |
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There are, in general, five types of general ledger accounts that the typical business accounting system deals with: Asset, Liability, Equity, Revenue and Expense. Income Statement (Revenue and Expense) accounts eventually get closed out into an Equity account called Retained Earnings at the end of the fiscal year and their balances start over again at zero. Balance Sheet accounts (Asset, Liability & Equity), however, continue to roll their balances from period to period and year to year. |
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The following two definitions are given by the Oxford Dictionary of Accounting. |
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i) “A procedure for confirming that the [[balance (accounting)|balance]] in a chequebook matches the corresponding [[bank statement]]. This is normally done by preparing a bank reconciliation statement.<ref name="owen">Owen, G. and Law, J. (2005). A dictionary of accounting. Oxford: Oxford University Press.</ref> |
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| ⚫ | To ensure the reliability of the financial records reconciliations must, therefore, be performed for all |
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<ref>http://instantcontroller.com/2010/12/intercompany-reconciliations</ref> |
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ii) A procedure for confirming the reliability of a company's accounting records by regularly comparing [balances of transactions]. An account reconciliation may be prepared on a daily, monthly, or annual basis.”<ref name="owen"/> |
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The [[generally accepted accounting principles]] (GAAP) are a set of accounting principles, procedures and standards that organisations use in order to compile their [[financial statements]]. GAAP states that the purpose of account reconciliation is to provide accuracy and consistency in [[financial accounts]]. To ensure all cash outlays and inlays match between cashflow statements and income statements it is necessary to carry out reconciliation accounts.<ref>Investopedia, (2003). Generally Accepted Accounting Principles (GAAP) Definition | Investopedia. [online] Available at: http://www.investopedia.com/terms/g/gaap.asp#ixzz3qTbiuFxO [Accessed 3 Nov. 2015]. |
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</ref> |
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Reconciliation is a process that may benefit businesses as this may help avoid [[balance sheet]] errors which may have led to detrimental ramifications; in addition, reconciliation may help against fraud and can help instill financial integrity. |
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[[Category:Banking terms and equipment]] |
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[[Accounting software]] is one of a number of tools that organizations use to carry out this process thus eliminating errors and therefore making accurate decisions based on the financial information. Reconciliation of accounts determines whether transactions are in the correct place or should be shifted into a different account. |
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Reconciliation in accounting is not only important for businesses, but may also be convenient for households and individuals. It is prudent to reconcile credit card accounts and checkbooks on a regular basis, for example. This is done by comparing debit card receipts or check copies with a person's bank statements. |
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{{economy-stub}} |
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Benefits of reconciling: |
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* To mitigate the mistakes made by financial institutions or fraudulent withdraws from an account, if any. |
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* To help create an overall image on spending and assess if a person is overspending on fees. |
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Account reconciliation is an important internal control in the financial reporting process. Public companies are required to perform these steps as a part of their financial close.<ref>{{Cite web|url=https://www.blackline.com/blog/account-reconciliations/what-are-account-reconciliations/|title=What Are Account Reconciliations?|date=2017-11-02|website=BlackLine Magazine|language=en-US|access-date=2019-02-07}}</ref> |
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== Methods == |
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| ⚫ | To ensure the reliability of the financial records, reconciliations must, therefore, be performed for all [[balance sheet]] accounts on a regular and ongoing basis. A robust reconciliation process improves the accuracy of the [[financial reporting]] function and allows the finance department to publish financial reports with confidence.<ref>[http://instantcontroller.com/2010/12/intercompany-reconciliations "Intercompany Reconciliations"], Instant Controller, 27 December 2010</ref> |
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There are two ways in which reconciliation can take place: |
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# Using a documentation review, “Document review is a formalised technique of data collection involving the examination of existing records or documents.”<ref>Ventureline.com, (2015). DOCUMENT REVIEW DEFINITION. [online] Available at: https://www.ventureline.com/accounting-glossary/D/document-review-definition/ (Accessed 3 Nov. 2015)</ref> This is the most common approach of account reconciliation. This method is done by using accounting software. |
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# The second method used is analytics review. “Any process by which a person or company looks at an account or financial statement and attempts to identify any irregularities. This may involve comparing financial and non-financial information.”<ref>TheFreeDictionary.com (2015). Analytical Review. Online [Available at: http://financial-dictionary.thefreedictionary.com/Analytical+Review] (Accessed 4 Nov. 2015)</ref> Reconciliation of accounts using this method is undertaken by estimating the transactions that should be in an account, usually based on other data, for example historical activity.<ref>Bragg, S. (2013). How do I reconcile an account? - Questions & Answers - AccountingTools. [online] Accountingtools.com. Available at: http://www.accountingtools.com/questions-and-answers/how-do-i-reconcile-an-account.html [Accessed 3 Nov. 2015].</ref> |
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In both cases where mistakes are identified as a result of the reconciliation, adjustments should be undertaken in order for the account balance to match the supporting information. |
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== Current practice == |
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Currently there are no specific account standards for accountancy reconciliation ''per se''. However, there are different rules for balancing many types of accounts. There are no specific regulations mentioned by IAS, ICAW and HMRC. GAAP provide different rules in regards to reconciliation to balance different types of accounts. According to GAAP, account reconciliation is a process that is performed through account conversion or double-entry accounting.<ref>Investopedia, (2015). How is reconciliation treated under generally accepted accounting principles (GAAP)?. Available at: [http://www.investopedia.com/ask/answers/042015/how-reconciliation-treated-under-generally-accepted-accounting-principles-gaap.asp#ixzz3qXJBbw66] (Accessed 4 Nov. 2015)</ref> |
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== Manual reconciliation to automation == |
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In the United States, the passage in 2002 of the [[Sarbanes–Oxley Act]] (SOX) has emphasized the need for balance sheet account reconciliation to be included within a company's own procedures, not relying only on [[external auditor]]s.<ref>James Brady Vorhies, [http://www.journalofaccountancy.com/Issues/2006/Sep/AccountReconciliationAnUnderappreciatedControl.htm "Account Reconciliation: An Under appreciated Control"], Journal of Accountancy, 1 September 2006</ref> The legislation was enacted “to protect shareholders and general public from accounting errors and fraudulent practices in the enterprise, as well as improve the accuracy of corporate disclosures.”<ref>M. Rouse, (2015). What is Sarbanes-Oxley Act (SOX)? - Definition from What Is.com. [online] Archdiocese. Available at: http://searchcio.techtarget.com/definition/Sarbanes-Oxley-Act [Accessed 2 Nov. 2015]</ref> SOX and other similar acts across the world have increased stress on organisations to comply. As a result, the accounting industry has sought ways to automate a previously strenuous manual process. The pressure of SOX is coupled with the perennial need to mitigate erroneous reconciliation in the process. |
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By using available [[information technology]], organizations can more easily automate their reconciliation and for each financial close cycle less manual labour would be required. As late as 2012, 90% of companies still reconciled manually, using [[Microsoft Excel]] spreadsheets.<ref>M. Spanicciati, ‘How automating balance sheet account reconciliation can lead to a real return on investment’, ''Financial Management'' (Sep. 2013), p. 57</ref> This process is arduous allowing for further [[human error]]. Automating reconciliation can significantly reduce aforementioned errors and increase efficiency. Further benefits of automated reconciliation include centralised control, improved monitoring, reduced operational costs, increased productivity and efficiency, improved accessibility, improved data security and reduced audit risks and costs.<ref>{{cite web |title=reconciliation-solution-enhance-the-reconciliation-process |url=https://www.ivp.in/resources/blogs/reconciliation-solution-enhance-the-reconciliation-process/ |website=Indus Valley Partners Corporation |publisher=Indus Valley Partners Corporation |access-date=7 July 2022}}</ref><ref>{{Cite web|date=2021-04-30|title=Automating Financial Reconciliation Process Through RPA|url=https://www.nuaig.ai/automating-financial-reconciliation-process-through-rpa/|access-date=2021-09-09|website=NuAIg|language=en-US}}</ref> |
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* [[Intercompany accounting]] |
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[[de:Überleitung (Rechnungslegung)]] |
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Latest revision as of 10:19, 24 July 2024
 | This article needs additional citations for verification. (July 2008) |
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In accounting, reconciliation is the process of ensuring that two sets of records (usually the balances of two accounts) are in agreement. It is a general practice for businesses to create their balance sheet at the end of the financial year as it denotes the state of finances for that period. Reconciliation is used to ensure that the money leaving an account matches the actual money spent. This is done by making sure the balances match at the end of a particular accounting period.[1]
Definition
[edit]The following two definitions are given by the Oxford Dictionary of Accounting.
i) “A procedure for confirming that the balance in a chequebook matches the corresponding bank statement. This is normally done by preparing a bank reconciliation statement.[2]
ii) A procedure for confirming the reliability of a company's accounting records by regularly comparing [balances of transactions]. An account reconciliation may be prepared on a daily, monthly, or annual basis.”[2]
The generally accepted accounting principles (GAAP) are a set of accounting principles, procedures and standards that organisations use in order to compile their financial statements. GAAP states that the purpose of account reconciliation is to provide accuracy and consistency in financial accounts. To ensure all cash outlays and inlays match between cashflow statements and income statements it is necessary to carry out reconciliation accounts.[3]
Reconciliation is a process that may benefit businesses as this may help avoid balance sheet errors which may have led to detrimental ramifications; in addition, reconciliation may help against fraud and can help instill financial integrity.
Accounting software is one of a number of tools that organizations use to carry out this process thus eliminating errors and therefore making accurate decisions based on the financial information. Reconciliation of accounts determines whether transactions are in the correct place or should be shifted into a different account.
Reconciliation in accounting is not only important for businesses, but may also be convenient for households and individuals. It is prudent to reconcile credit card accounts and checkbooks on a regular basis, for example. This is done by comparing debit card receipts or check copies with a person's bank statements.
Benefits of reconciling:
- To mitigate the mistakes made by financial institutions or fraudulent withdraws from an account, if any.
- To help create an overall image on spending and assess if a person is overspending on fees.
Account reconciliation is an important internal control in the financial reporting process. Public companies are required to perform these steps as a part of their financial close.[4]
Methods
[edit]To ensure the reliability of the financial records, reconciliations must, therefore, be performed for all balance sheet accounts on a regular and ongoing basis. A robust reconciliation process improves the accuracy of the financial reporting function and allows the finance department to publish financial reports with confidence.[5]
There are two ways in which reconciliation can take place:
- Using a documentation review, “Document review is a formalised technique of data collection involving the examination of existing records or documents.”[6] This is the most common approach of account reconciliation. This method is done by using accounting software.
- The second method used is analytics review. “Any process by which a person or company looks at an account or financial statement and attempts to identify any irregularities. This may involve comparing financial and non-financial information.”[7] Reconciliation of accounts using this method is undertaken by estimating the transactions that should be in an account, usually based on other data, for example historical activity.[8]
In both cases where mistakes are identified as a result of the reconciliation, adjustments should be undertaken in order for the account balance to match the supporting information.
Current practice
[edit]Currently there are no specific account standards for accountancy reconciliation per se. However, there are different rules for balancing many types of accounts. There are no specific regulations mentioned by IAS, ICAW and HMRC. GAAP provide different rules in regards to reconciliation to balance different types of accounts. According to GAAP, account reconciliation is a process that is performed through account conversion or double-entry accounting.[9]
Manual reconciliation to automation
[edit]In the United States, the passage in 2002 of the Sarbanes–Oxley Act (SOX) has emphasized the need for balance sheet account reconciliation to be included within a company's own procedures, not relying only on external auditors.[10] The legislation was enacted “to protect shareholders and general public from accounting errors and fraudulent practices in the enterprise, as well as improve the accuracy of corporate disclosures.”[11] SOX and other similar acts across the world have increased stress on organisations to comply. As a result, the accounting industry has sought ways to automate a previously strenuous manual process. The pressure of SOX is coupled with the perennial need to mitigate erroneous reconciliation in the process.
By using available information technology, organizations can more easily automate their reconciliation and for each financial close cycle less manual labour would be required. As late as 2012, 90% of companies still reconciled manually, using Microsoft Excel spreadsheets.[12] This process is arduous allowing for further human error. Automating reconciliation can significantly reduce aforementioned errors and increase efficiency. Further benefits of automated reconciliation include centralised control, improved monitoring, reduced operational costs, increased productivity and efficiency, improved accessibility, improved data security and reduced audit risks and costs.[13][14]
See also
[edit]References
[edit]- ^ Jean Scheid, "Understanding Balance Sheet Account Reconciliation", Bright Hub, 8 April 2011
- ^ a b Owen, G. and Law, J. (2005). A dictionary of accounting. Oxford: Oxford University Press.
- ^ Investopedia, (2003). Generally Accepted Accounting Principles (GAAP) Definition | Investopedia. [online] Available at: http://www.investopedia.com/terms/g/gaap.asp#ixzz3qTbiuFxO [Accessed 3 Nov. 2015].
- ^ "What Are Account Reconciliations?". BlackLine Magazine. 2017-11-02. Retrieved 2019-02-07.
- ^ "Intercompany Reconciliations", Instant Controller, 27 December 2010
- ^ Ventureline.com, (2015). DOCUMENT REVIEW DEFINITION. [online] Available at: https://www.ventureline.com/accounting-glossary/D/document-review-definition/ (Accessed 3 Nov. 2015)
- ^ TheFreeDictionary.com (2015). Analytical Review. Online [Available at: http://financial-dictionary.thefreedictionary.com/Analytical+Review] (Accessed 4 Nov. 2015)
- ^ Bragg, S. (2013). How do I reconcile an account? - Questions & Answers - AccountingTools. [online] Accountingtools.com. Available at: http://www.accountingtools.com/questions-and-answers/how-do-i-reconcile-an-account.html [Accessed 3 Nov. 2015].
- ^ Investopedia, (2015). How is reconciliation treated under generally accepted accounting principles (GAAP)?. Available at: [1] (Accessed 4 Nov. 2015)
- ^ James Brady Vorhies, "Account Reconciliation: An Under appreciated Control", Journal of Accountancy, 1 September 2006
- ^ M. Rouse, (2015). What is Sarbanes-Oxley Act (SOX)? - Definition from What Is.com. [online] Archdiocese. Available at: http://searchcio.techtarget.com/definition/Sarbanes-Oxley-Act [Accessed 2 Nov. 2015]
- ^ M. Spanicciati, ‘How automating balance sheet account reconciliation can lead to a real return on investment’, Financial Management (Sep. 2013), p. 57
- ^ "reconciliation-solution-enhance-the-reconciliation-process". Indus Valley Partners Corporation. Indus Valley Partners Corporation. Retrieved 7 July 2022.
- ^ "Automating Financial Reconciliation Process Through RPA". NuAIg. 2021-04-30. Retrieved 2021-09-09.