Reconciliation in
accounting refers to the process of comparing the balances of general ledger
accounts with other sources of information to ascertain financial reports are
correctly made. An example of reconciliation in banking is the comparison of a
current account’s general ledger account with its bank statement. Reconciling
accounts is a very important practice in accounting because it facilitates an
accurate evaluation of the financial stability of a company. Many businesses
have failed because of bad accounting, and one of the main problems has been the
inability to reconcile accounts.
Accountants in companies will begin to do reconciliation for general ledger
accounts after they have received information for all the business transactions
completed within the month. After reconciling the accounts and all transactions
are well accounted for, the books will be closed and no other changes can be
made to the financial information for the month. The reconciliation done at the
end of the year is the most important because it requires accountants to make
use of accounting information to prepare the income taxes.
By reconciling general ledger accounts, accountants can produce
correct financial statements for companies, including balance sheet, income
statement, and cash flow statement. It is not uncommon mistakes are made when
transactions are posted to the accounting system, and these mistakes can be
rectified during the process of reconciliation. This will make the information
shown in financial statements more reliable. After accountants discover errors
in financial reports, they may suggest changes for certain business procedures,
to avoid future errors.
To reconcile accounts actually means to “balance” accounts. When an account
is reconciled, the debit entry is equal to the credit entry. Usually, the
process of reconciliation begins with the examination of all entries in
financial reports. Business transactions can come in the form of purchases or
sales, which may be made everyday. For example, if a company uses cash to
purchase office equipment, the accountant will credit cash and debit the account
for office equipment. After that, they will write a report for the transaction,
and any errors discovered will also have to be included in this report. Finally,
financial statements have to be created with the information from the general
ledger, and these statements include balance sheet, statement of income, or cash
flow statement. It is important to have the general ledger reconciled regularly,
so financial statements will be more accurate.
Company owners should be aware of the importance of the reconciliation of
accounts, and should find ways to make sure the reconciliation is properly done.
Other than the employee who reconciles the accounts, another employee should be
given the responsibility of reviewing the reconciliation. This will help
maintain the integrity of the company’s accounting information, and it will
reveal all discrepancies in accounting records, whether they are honest errors
or embezzlement.
Those who wish to learn how to reconcile accounts can attend courses that
offer a high school
diploma or college
diploma in accounting.
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