What is reconciliation in accounting? To answer this question, one must first identify what type of account needs to be reconciled. You may have balance sheet accounts such as checking or savings accounts, petty cash or investment accounts. Certain types of companies or individuals may have transit accounts which need to be reconciled.
The answer to what is reconciliation is simple. It is ensuring two sets of records, such as your ledger and bank statement agree. You can also reconcile revenue and expense accounts to each other or ensure certain balance sheet accounts reconcile to zero. For example, liability accounts such as health insurance, unemployment insurance and state income taxes should equal zero. Reconciling these accounts ensure your liabilities are paid on a monthly basis. The only exception to this is if a payroll does not occur monthly. If you reduce your health insurance liability monthly when you pay the bill, but money is withheld from your employee's paychecks weekly, biweekly or semimonthly, this liability account will not reconcile until the end of the year.
What Is Reconciliation in Accounting?
Financial accountants may wonder what is a reconciliation of transit accounts. Non-profit organizations, such as churches, do not follow the same reporting standards as publically traded companies. They may find it useful to track money needed to be transited out in revenue and expense accounts. For example, the Roman Catholic Diocese of Charlotte, which encompasses all parishes, missions and Catholic schools in the state of North Carolina, instructs its churches to collect money for specific charities such as paying utilities for the poor, feeding the hungry or providing diapers for needy mothers. A church will collect this money, record it in its general ledger as revenue, then the accounts receivable accountant will communicate to the accounts payable accountant to create a bill expensing an account related to the revenue account. If the transit revenue account 501701 Catholic Charities shows $12,000 coming in, at the end of the period, there should be the same expense, if not already paid, at least in Accounts Payable waiting to be paid. If the amount is less than $12,000, you know you have money in your checking account which does not belong to you and needs to be paid out. If the amount is greater than $12,000, you know you either miscoded a revenue, an expense or sent a duplicate check or money transfer.
What is reconciliation good for? Whether you run a company or just your household's finances, it is important to track your income and spending and reconcile accounts. If you update your ledger daily, you can prevent over-drafting your account. If you reconcile your checking account monthly, you will know the true balance of your bank account, including checks you have written which are pending for withdrawal. This will stop you from spending money you do not actually have. What is reconciliation done for besides preventing overdraft? Reconciliation also serves the purpose of catching fraudulent charges. You can never be too careful with your financial information or identity. The sooner you catch fraudulent charges, the sooner you can have these purchases reimbursed back to you, freeze the appropriate accounts and file police reports.
What is reconciliation to financial accountants? Reconciling accounts ensures your liabilities are paid such as local, state and federal taxes. It also ensures your ledger is complete so that your financial accountants can run accurate, useful and informative reports. The accuracy of your balance sheet depends on accurate reconciliations. The accuracy of your financial statements is important to keep up-to-date so you are prepared if external auditors come to review your books. Even if you just keep up with your household finances, it is important that your balance sheet and profit-and-loss reports are accurate. An accurate P&L (profit and loss) statement allows you to budget for your next fiscal year, or 12-month period that you will be tracking your income and expenses. You can see at a glance how much you spent each month on fuel, eating out, groceries, water or electricity.
By keeping an accurate record of your balance sheet, you can see if your financial worth, the net of your assets and liabilities, is increasing or decreasing year after year. If you or your partner feels stressed because you went a month without purchasing alcohol, going to a concert or play or hosting a party, check your net worth and compare your balance sheet accounts to goals you set for yourself. It may comfort you to see that you have prepaid your mortgage or property taxes, set aside more than you budgeted for retirement or a sinking fund for a medical emergency. You may have already funded your Christmas budget ,and it is only August. What is reconciliation good for? Peace of mind for business owners, families and individuals.
Steps to Reconcile Accounts
Once you know the answer to what is reconciliation, it is important to learn how to reconcile your accounts. Accounting software connects to your bank accounts, saving you a lot of time, but what about the cash you spend? First, compare your bank statement to your general ledger and check off each deposit and payment on your ledger which appears on your bank statement. Your ledger may be electronic such as in Excel or Google Spreadsheets or on paper such as specially designed ledger paper or college ruled line paper. Note on your bank statement which transactions you do not have any evidence for such as a check stub or payment receipt. Research these transactions as it could be an indication that money was erroneously deposited into your account or someone is charging on one of your cards fraudulently.
Take note of all transactions within the reconciliation period shown as paid out, including debit or credit card purchases, wire transfers, checks and ATM transactions which do not appear on your bank statement. Subtract these from your statement balance as these will come out eventually, so you should not be under the impression you have this money. Similarly, make a note of all transactions which have cleared that you have not recorded yet in your ledger. These may be overdraft fees, interest charged to your credit card if your balance was not paid in full, ATM service charges, non-sufficient funds (NSF) charges and other bank fees.
Ensure all funds coming into your company or home are reflected both in your ledger and your checking account. If you have records of deposits or account credits which do not appear on your bank statement, add these to your statement balance so you have an accurate account of operating capital. If you have money that does not appear on your books, but is on your bank statement, add this to your ledger. It may be interest which you did not realize posted before the reconciliation began.
After researching all transactions you do not have support for, alert the bank immediately of any errors you find. Subtract from your bank statement balance any deposits which do not belong to you. Add back to your balance any charges that have come out which you did not authorize. Once all this is finished, your bank statement balance equals your ledger balance as of the end of the same period. If there are many discrepancies, create a schedule detailing the differences between your ledger and bank account.
Best Personal Finance Software
There are many great personal finance software solutions out there. The best free finance tracking is Mint by Intuit, the company that brought you QuickBooks Desktop and Online, Turbotax and Proconnect for tax professionals. The best personal finance software for budgeting is YNAB, or You Need a Budget. The best personal finance software for investing is Personal Capital. The best paid finance tracking software is Quicken.
Why get personal finance software? Because it saves you time. Rather than categorizing Wendy's as "food" or "restaurants", Quicken will categorize it as "fast food." You still need to review these categories periodically. If you bought three cases of beer from Publix for a party, you may re-class the purchase as "entertainment" rather than "groceries." If you were doing this by hand, there would be no need to re-code these purchases, but not only does it save you time entering hundreds of transactions per month and start your bank reconciliation for you automatically, it also runs useful reports.
You will be able to see in a pie chart the percentages of each spending category. View your spending habits in depth at the click of a button in an easy-to-understand format, so you can make useful changes. If 55% of your income is being spent on transportation, look to reduce your car insurance bill, refinance your auto loan or try to find a gas station which charges less for fuel. Maybe it is time to dip into your savings account and buy a new car because you are spending $1,000 monthly on maintenance. You will never know in black and white if you do not track your expenses and reconcile your accounts.
What is reconciliation for accountants? Ensuring a company's general ledger matches its bank balance. It is useful for both internal purposes to better guide the company into the future and for external ones for review by external auditors or potential investors. Furthermore, it is important for individuals and households to ensure they are not overspending and are on track with debt repayment and savings goals including travel, entertainment, parenthood, retirement, continued education and more. If you are not an accountant by trade, look for personal finance software to automate most of the tedious task of tracking and analyzing your personal finance. Clearly see in color where your money is going and adjust your spending in the future as necessary.