Financial reconciliation is the accounting process by which two different data sets are compared to verify that the information within them is accurate.
Reconciliation is an important business accounting practice that ensures the reliability of a business’s financial records.
It is typically done on a regular basis and is applied to varying sources of financial information within the business.
Reconciliation is a vital process that is applied to all manner of financial transactions within the business. At its most basic level, it is used to verify that the business is being properly credited for income received and that money leaving the business corresponds correctly to known payments being made.
Financial reconciliation examines two sets of information, one internal and one external.
Juxtaposing the business’s internal records against an external source provides an opportunity to verify that the business’s data is accurate.
Financial reconciliation is typically performed by comparing the business’s own financial data to source documents and records that correspond to the particular transactions being reconciled from entities outside the business, like a bank or vendors. These include such documents as invoices, receipts, and transaction statements.
Financial reconciliation is an important process that ensures the validity of the business’s financial records.
It has many benefits and can help a business:
Catch errors in data entry
Correct timing discrepancies with bank transactions, fees, and interest
Ensure the accuracy and validity of financial statements produced by the business
Detect fraud
Comply with financial regulations
Prepare for tax filings
Financial reconciliation is performed in a number of different ways. It is typically done at the end of an accounting period, such as at the time of the month end close.
This ensures that transactions that are being closed out are properly verified, and that the closing statements are accurate.
There are two basic types of financial reconciliation.
A business can perform financial reconciliation by reviewing documents.
This is done by examining transactions in the business’s own financial records and comparing those with source documents, such as receipts, invoices, or statements.
A business can also perform financial reconciliation by doing an analytics review. This is done by performing a historical analysis and comparing this to current data. If present accounting figures are widely different from projections made from historical data, this may be a sign of irregularities.
Using one of these two basic approaches, financial reconciliation is performed in a variety of contexts within the business.
For example, when a business performs a bank reconciliation, it compares its own financial statements with the records it received from the bank. This helps catch timing delays in deposits, payments, fees, and interest that may have been recorded by one entity but not the other.
Petty cash reconciliation is the process by which the business ensures that its petty cash funds are being spent according to internal guidelines and policies, and that all transactions are being properly documented with a receipt or invoice.
Most financial reconciliations are performed against the general ledger as is this is considered the master source of financial records for the business.
Financial reconciliation is performed in a number of different ways:
Bank reconciliation involves the business reconciling its own financial statements with the statements it receives from the bank
A vendor reconciliation will compare statements provided by the vendor or supplier with the business’s own accounts payable ledger
Intercompany reconciliation is the process of reconciling statements and transactions between units, divisions, or subsidiaries of the same parent company
Business specific reconciliation involves the reconciliation of accounts in a specific business unit, such as a stock inventory or expenses reconciliation
Petty cash reconciliation is the process of verifying all transactions in the petty cash fund
Credit card reconciliation compares purchase receipts with credit card statements provided by the credit card company
Financial reconciliation is an essential business accounting function. It helps businesses address several fundamental objectives in their accounting process.
All businesses must identify errors, whether they occur in data entry, at the bank account level, because of omission, lack of information, duplication, or for some other reason.
Financial reconciliation helps identify fraud. All businesses are vulnerable to unscrupulous employees, cyber-theft, dishonest customers, vendors, or suppliers. Financial reconciliation can help prevent fraudulent activity by identifying duplicate checks, unauthorized credit card activity, or altered invoices.
Financial reconciliation is an important process to ensure the validity and accuracy of all financial statements. Individual transactions are the building blocks of financial statements produced by the business. It is imperative for the business to verify all transactions before they are used to produce those statements.
Financial reconciliation is an essential tool to help companies comply with federal regulations applied by the Securities and Exchange Commission (SEC) under the federal Sarbanes-Oxley law.
Finally, all business must prepare for tax filings. Financial reconciliation allows a business to eliminate errors and provide accurate filings.
Looking to enhance your financial reconciliation process? Dive into our blog to discover how BlackLine can streamline your account reconciliations.
Financial reconciliation is comprised of a number of steps and processes.
The first phase of reconciliation is to gather and prepare the necessary documentation. This entails identifying the appropriate account(s) to be reconciled and the time period for which the reconciliation will apply.
Ledgers with debits and credits for the account in the period of review will provide the transaction details to be reconciled.
Once all the documentation is prepared, the accounting team will analyze the data. They will review all debits and credits, substantiating them against outside documentation, and making all necessary adjustments. The team will also verify opening and ending balances.
The final stage includes retention of all documents. A controller or accounting manager will review the analysis.
This analysis confirms the details of the reconciliation to make sure that all balances are in agreement, supporting documents are provided to verify the transactions, and all adjustments were appropriately made.
Account Reconciliation automates and standardizes the reconciliation process to produce high-quality and accurate financial statements. It drives accuracy in the financial close by providing accountants with a streamlined method to verify the correctness and appropriateness of their balance sheets.