All about: Account reconciliation

Account reconciliation practices have come into question over the last decade due to corrupt practices that have caused the collapse of major multi-national firms. This article briefly explains what account reconciliation is and how accountants do it within organisations.

The basics

Account reconciliation is the comparison of financial records to determine whether they tally. Organisations usually undertake this process periodically to ensure that their income and expenditures meet with the budgetary stipulations. Process The basic process involves observing records to see whether what the organisation has spent is within the limits set at the beginning of the accounting period based on the funds available. Accountants compare the amounts recorded as spent against what was available before expenditure, and what remains after the period. When the two figures are in tandem, observers can consider the account balanced. Account reconciliation involves the examination of specific business accounts found in organisations. These accounts include the following: - Assets - Liabilities - Revenue - Expenses - Equity How it functions Accountants usually combine the revenues and expenses (cash reconciliation) and call it the income statement. Thereafter, they consolidate the two segments in the equity account and giving them the title ‘Retained earnings’. When the financial year is over, the accountants reduce revenues and expenses to zero before the new period begins. Whatever surpluses or deficits, the two segments generate move into the equity section.

The finalisation

After completing the equity segment, the accountants consolidate the asset, liability and equity segments into what become the balance sheet accounts. These accounts roll their surpluses and deficits from year to year, and give an overall picture of a firm’s financial health. How to ensure that an account reconciliation is foolproof To ensure that an account reconciliation is foolproof, an organisation’s finance division should conduct continuous mini-reconciliation to capture all the information relevant to the company’s financial health. Once that the process is complete, organisations usually invite internal or external auditors to examine the reconciled accounts to see if there are any shortfalls in the final records. Final word Account reconciliation is one of the necessary ingredients for any organisation to be a success in the short and long-term. Any meaningful enterprise must understand how its funds flow because finances are to an organisation what blood is to the body.