Understanding Reconciliation

Reconciliation is an accounting procedure that compares two sets of records to check that the figures are correct and in agreement.

The process of reconciliation ensures the accuracy and validity of financial information. A proper reconciliation process ensures that unauthorized changes have not occurred to transactions during processing.

Types of Reconciliations

There are two types of reconciliations viz. Personal Reconciliation and Business Reconciliation.

Personal Reconciliation: Individuals regularly verify their bank account statements as well as Credit card statements and compare money received and payments made by them through cash withdrawals from the bank, cash withdrawals from ATM, UPI payments, cheques issued, money transfers, etc.  This form of account reconciliation lets individuals see if money is being taken from their accounts fraudulently. Individuals can also ensure that the Bank has not made any errors in their accounts by reconciling their accounts. When an account is reconciled, the account holder gets a clear picture of monthly expenditure and also notices that any cheques or cash deposited at a bank not credited to their account or cheques deposited by them are returned unpaid and the bank has not informed them about return cheques.

Business Reconciliation:

Companies perform bank reconciliation to ensure that their financial records match their bank statements. This process helps to confirm the following:

Accuracy:

Reconciliation ensures that transactions have been properly authorized. Especially, if the source documents are paper-based, review for potential changes to the document between approval and processing of transactions. Also, it ensures that all transactions taking place are allowable.

Error correction:

Reconciliation detects errors and discrepancies, intentional or unintentional, and resolves them in a timely fashion.         

Fraud detection

Unexplained discrepancies between records can indicate fraud. For example, a deposit in transit that remains on the reconciliation for much longer than it should could be a sign of fraud.  An employee pays personal bills and credit card accounts with organization funds using valid business names as vendors, but the irregular transactions never have official business purposes. Regularly reconciling accounts helps detect and prevent fraudulent activities by identifying any unusual transactions or inconsistencies.

Financial control

The process of bank reconciliation tightens internal controls by instituting a routine check and balance system that reduces the probability of fraud and error within the organization. Bank reconciliation helps companies better control cash and manage their finances by ensuring all transactions are accurately recorded. 

Compliance

Bank reconciliation identifies errors in both the company’s records and the bank’s statements, ensuring all transactions are accurately recorded. It ensures compliance with regulatory and audit requirements, providing detailed and accurate financial statements.  

Cash flow management

Bank reconciliation helps companies manage cash flow by providing a clear picture of available funds and financial health.  

Tracking

Bank reconciliation helps companies track interest and fees, especially when banks add penalties or charges to their account.

 Tracking receivables

Insufficient funds in the account may cause bounced cheques that may damage the reputation of the company and lead to an unsavoury relationship between the company and its customers. Bank reconciliation helps companies confirm their receipts and identify the ones they have not deposited.

Conclusion:

Bank reconciliation helps ensure that a company’s financial records comply with relevant laws and regulations.  It helps in fraud detection and locating errors. Bank reconciliation also helps companies better control cash and manage their finances by ensuring all transactions are accurately recorded. Bank reconciliation helps prepare a business for audits by ensuring that records are accurate and up-to-date.

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