Reconciliation is the process of comparing two sets of financial records to verify they are consistent and accurate. It identifies discrepancies between records — such as bank statements versus the general ledger, or accounts receivable versus customer statements — and ensures financial data integrity.
In Depth
Reconciliation is the quality assurance process for financial data. Without regular reconciliation, errors, omissions, and fraud can go undetected, compromising the accuracy of financial statements and management reports.
Common types of reconciliation include: bank reconciliation (comparing the GL cash account to the bank statement), accounts receivable reconciliation (verifying customer balances), accounts payable reconciliation (verifying supplier balances), intercompany reconciliation (ensuring both sides of intercompany transactions agree), fixed asset reconciliation (verifying the asset register against the GL), and balance sheet reconciliation (reviewing every balance sheet account for accuracy).
The reconciliation process typically involves: extracting both records, matching items that appear in both, identifying and investigating unmatched items, determining the correct treatment for discrepancies, posting any necessary adjusting journal entries, and documenting the reconciliation for audit.
FP&A teams rely on accurate reconciliations because their analysis is only as good as the underlying data. A bank reconciliation error means the cash position is wrong. An intercompany reconciliation error means the consolidated P&L is wrong.
For UK businesses, bank reconciliation is particularly important for VAT reclaim purposes (HMRC may audit VAT claims against bank records) and for detecting fraudulent transactions (segregation of duties between those who reconcile and those who approve payments).
Real-World Example
A UK company's monthly bank reconciliation identifies a £15K discrepancy: the GL shows £2.34M cash while the bank statement shows £2.355M. Investigation reveals three items: a £12K customer payment received on the last day of the month but not yet recorded in the GL (timing difference), a £2K bank charge not yet posted (missing entry), and a £1K credit for a refund not yet matched to the original transaction. The accountant posts two correcting journals and documents the timing difference.
Related Terms
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The general ledger (GL) is the central repository of all financial transactions recorded by a compan...
Bank reconciliation is the process of comparing a company's internal cash records (general ledger) w...
Intercompany reconciliation is the process of verifying that transactions between entities within th...
An audit trail is a chronological record of all financial transactions and changes to financial reco...
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