Finance Basics | Reconciliations Explained for Dummies | Balance Sheets

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Reconciliation is an accounting process that compares two sets of records to check that figures are correct and in agreement. Reconciliation also confirms that accounts in the general ledger are consistent, accurate, and complete.

The Reconciliation Process
In most organizations, the reconciliation process is usually automated, using accounting software. However, since some transactions may not be captured in the system, human involvement is required to identify such unexplained differences. The basic steps involved when reconciling transactions include the following:


1. Compare internal cash register to the bank statement
The first step is to compare transactions in the internal register and the bank account to see if the payment and deposit transactions match in both records. Identify any transactions in the bank statement that are not backed up by any evidence.


2. Identify payments recorded in the internal cash register and not in the bank statement (and vice-versa)
It is possible to have certain transactions that have been recorded as paid in the internal cash register but that do not appear as paid in the bank statement. The transactions should be deducted from the bank statement balance. An example of such a transaction is a check that has been issued but has yet to be cleared by the bank.

A company may issue a check and record the transaction as a cash deduction in the cash register, but it may take some time before the check is presented to the bank. In such an instance, the transaction does not appear in the bank statement until the check has been presented and accepted by the bank.

Conversely, identify any charges appearing in the bank statement but that have not been captured in the internal cash register. Some of the possible charges include ATM transaction charges, check-printing fees, overdrafts, bank interest, etc. The charges have already been recorded by the bank, but the company does not know about them until the bank statement has been received.


3. Confirm that cash receipts and deposits are recorded in the cash register and bank statement
The company should ensure that any money coming into the company is recorded in both the cash register and bank statement. If there are receipts recorded in the internal register and missing in the bank statement, add the transactions to the bank statement. Consequently, any transactions recorded in the bank statement and missing in the cash register should be added to the register.


4. Watch out for bank errors
It is possible to have certain transactions that have been recorded as paid in the internal cash register but that do not appear as paid in the bank statement. The transactions should be deducted from the bank statement balance. An example of such a transaction is a check that has been issued but has yet to be cleared by the bank.

The errors should be added, subtracted, or modified on the bank statement balance to reflect the right amount. Once the errors have been identified, the bank should be notified to correct the error on their end and generate an adjusted bank statement.


5. Balance both records
The objective of doing reconciliations to make sure that the internal cash register agrees with the bank statement. Once any differences have been identified and rectified, both internal and external records should be equal in order to demonstrate good financial health.



Sources:
https://corporatefinanceinstitute.com...
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