What Are You Primarily Doing When You Reconcile?

Financial reconciliation is the accounting practice of verifying that two distinct sets of financial records align. This process is important for both personal financial management and business operations.

Comparing Financial Records

The primary action in reconciliation involves systematically matching transactions and balances between independent financial records. This means comparing internal documents, such as a personal checkbook register or a company’s general ledger, against external statements like a bank statement or credit card statement. The goal is to identify matching transactions and pinpoint items that appear on one record but not the other, or that show differing amounts.

The process begins by comparing starting and ending balances on both sets of records. Then, each individual transaction, including deposits, withdrawals, and payments, is reviewed. For instance, one might check off cleared checks listed on a bank statement against entries in a personal ledger, or verify direct deposits.

This methodical comparison aims to confirm that every entry in one record has a corresponding entry in the other. It helps in spotting transactions that have been processed by one entity but not yet by the other. This stage focuses on comparison and identification, laying the groundwork for subsequent steps if discrepancies are found.

Investigating Discrepancies

After the initial comparison phase, if financial records do not immediately match, the next step involves investigating the root cause of each identified difference. This analytical work is an important part of the reconciliation process. It requires a detailed examination to understand why an item on one record does not correspond with the other.

Discrepancies fall into several common categories. Timing differences occur when a transaction is recorded by one party but has not yet been processed or posted by the other; examples include outstanding checks that have been written but not yet cashed, or deposits in transit that have been made but not yet cleared by the bank. Errors, such as transposition errors where numbers are accidentally swapped, or omission errors where an entry is forgotten, can also cause mismatches, whether made by the record-keeper or the external institution.

Other discrepancies might include missing entries, such as unrecorded bank fees, interest earned, or automated payments that were not documented in internal records. Unfamiliar transactions appearing on an external statement also require investigation to determine their legitimacy and purpose. The investigative steps involve reviewing original source documents, re-calculating figures, and contacting the external party, like a bank, to clarify their records.

Correcting Account Balances

Once discrepancies have been thoroughly investigated and their causes understood, the final primary action in the reconciliation process is to make the necessary adjustments to achieve agreement. This involves updating the internal financial records to accurately reflect the true financial position. The goal is to bring the internal accounts into alignment with the correct external balance.

Corrections involve recording transactions that were previously missing from internal records, such as bank service fees, interest income, or cleared checks. For example, a bank might impose a monthly service charge or pay interest on an account, and these amounts need to be added to the internal ledger if not already present. If internal errors, like an incorrect amount entered for a payment, are discovered, adjustments are made to correct these figures.

In cases where the external party, such as a bank, has made an error, the process involves contacting them to rectify their records. However, internal corrections are made to one’s own records. The adjustments ensure that the internal financial statements are reliable for decision-making and reflect financial health.