Understanding Reconciliation Questions in Accounting: An Overview

In the accounting world, accuracy is key. When financial information doesn’t line up correctly, it can result in errors, problems, and/or expensive mistakes. The reconciliation process ensures your financial data is accurate, error free, and trustworthy through a very basic but immeasurable tool to keep your business finances accurate and honest.

Whether you are a business professional, a student pursuing an accounting degree, or simply an individual learning how to do your own taxes, this guide will help break down the reconciliation process into understandable components.

What Is Reconciliation in Accounting?

Reconciliation is the act of comparing two sets of financial statements to validate & verify their accuracy and financial integrity against each other and correcting any discrepancies.

If there is any difference identified, an accountant will work with you to discover, investigate, identify and eliminate any mistakes and make the record(s) of the account(s) accurate and complete.

The main purpose of reconciliation is to confirm that the financial balances recorded in your accounting books are accurate and properly reported based on the transactions you actually engaged in at that particular time.

As a general example:

The reconciliation process helps you validate that the accounts recorded in your accounting system are equivalent to what has actually occurred in the real world.

Why Is Reconciliation Important?

Every business (large and small) should reconcile its financial statements regularly for many reasons.

1. Ensures Financial Record-Making is Accurate

Financial records you maintain reflect how much you are selling (sales), how much you are buying (purchases), how much money you are receiving from banks (bank transactions), etc., and if your records are accurate, then they are also consistent.

2. Improved Knowledge of Cash Flow

The cash you have is a record of the actual money coming in and out of your business, versus the projected profit or loss in your system.

3. Audit and Compliance Support

When a company is audited by a company that offers the best accounting services in Dubai, having up-to-date and accurate books streamline the process of auditing. Additionally, maintaining your business’s books in compliance with accounting standards (GAAP) provides assurance that your financial statements are accurate and meet state and federal regulations.

Below are examples of common types of reconciliations performed regularly by companies: 

• Bank Reconciliation: This is an easy way to reconcile your bank statements with your internal cash records. 

For instance, if you record a payment for a customer but the customer has yet to pay you, the reconciliation process identifies the timing difference between the time you received the bill and when you actually designated the bill as being paid.

• Supplier (Vendor) Reconciliation: Supplier (vendor) reconciliation compares the amounts you owe your suppliers to what they are reporting to you. Supplier reconciliation helps determine:

1. What bills are outstanding

2. If any overpayments have occurred

3. If any invoices are missing

• Customer Reconciliation: A customer reconciliation helps reconcile amounts owed by the customer(s) to what you have recorded in your records. Customer reconciliation helps identify:

1. Underpayments

2. Missing receipts

3. Errors in billing

• Intercompany Reconciliation: This reconciliation method is used by companies with multiple branches or locations. An intercompany reconciliation ensures all transactions occurring between two or more divisions of a company are accurately recorded in both records.

• Reconciliation of the General Ledger: Ensures that each account (such as assets/liabilities/expenses, etc.) matches what is recorded.

Examples are inconclusive, but include:

– Paycheck for comparison with Payroll

– Item For Sale against Receivable records

How Reconciliation Works

Conceptually, reconciliation consists of five distinct steps:

1. Gather both the original record and the supporting record

Examples:

• Bank Statements Vs Cash Books
• Supplier Statement Vs Accounts Payable Ledger
• Customer Record Vs Accounts Receivable Ledger

2. Compare original records with supporting records for each line item.

3. When comparing, identify any discrepancies (for example):

• Bank Fees
• Interest Credits
• Errors due to timing or other reasons
• Errors in entering data or duplicate entry

4. Adjust and reconcile where appropriate.

5. Review the final balances and verify that they are the same between the two records.

Business Practice

Finish reconciling all records between both records in a timely manner. The frequency of reconciliation is determined by the type of company and types of transactions performed. Reconciliation should take place on a monthly/weekly basis for banks; suppliers and customers each create business transactions on a monthly basis; general ledger reconciliations may be performed monthly and quarterly; intercompany reconciliations may be performed on a monthly or yearly basis.

Methods for reconciliating accounts or, more importantly, accounts with accounts receivables (A/R) or accounts payable (A/P) are primarily manual methods. Other methods of Account Reconciliation are:

● The use of Account Reconciliation software (such as Xero, Quickbooks, Tally, Zoho Books)

● Using Enterprise Resource Planning systems

● Using spreadsheet templates

● Using automated Account Reconciliation tools.

These automated tools save time and reduce errors by matching records automatically.

Advantages of Automating Account Reconciliation

Automation has gained popularity as a method of Account Reconciliation because:

• Automation reduces the time spent manually checking records and accounts to ensure accuracy

• Automation reduces errors associated with Account Reconciliation processes

• Automation provides real-time access to Account Reconciliation status

• Automation assists Account Reconciliation audits

• Automation leads to improved accuracy of financial records.

Closing Remarks 

Reconciliation requires continual effort to ensure the reliability and accuracy of your financial records and to detect fraudulent activity. Reconciliation is a routine task performed daily by most businesses, but it is also critical for keeping your business’s financial records accurate and current. Get your company audited by a trusted accounting firm in Dubai today!