Reconciliation in Accounting Meaning & Importance

Accounting reconciliation meaning

The world continues to expand the use of digital currency, but also retains the use of cash. It now becomes even more important to reconcile devices that manage both types of transactions. But, what is the meaning of reconciliation in accounting?

 

What is the Meaning of Reconciliation in Accounting?

At its simplest, the meaning of reconciliation in accounting is the matching two sets of data and identifying any mismatches (or discrepancies).

Of course, reconciliation increases in complexity with different types of transactions, complex processes and data points compared.  

A reconciled position does not necessarily require an exact matched position – it is all about what you are measuring. For example, an item sold for £100 plus VAT, reconciled alongside a received payment of £120 (£100 + VAT of £20) would still achieve a balanced position.

 

So why is reconciliation important?

At its core, reconciliation is a fundamental way of confirming and validating an expected position. It is also an important way to identify any discrepancies or missing data, which could impact your business.

By way of illustration, say you own a car park and record all parking charges (and therefore revenue) via the parking system. Your payment provider captures all credit card (digital) payments as transactions. Then, your bank account is directed credited with these payments.

Matching the parking charge against the bank credit confirms the received settlement for that particular parking service.

If you cannot match or reconcile the transaction, this could mean a number of things, ranging from missing revenue through to underlying issues with the credit card settlement process.

In any case, the mismatch would require investigation to identify the reason for the discrepancy and how to correct it.

 

So What?

The above illustration sounds pretty straightforward on an individual basis. However, add another 500 transactions, some paid by card, some by cash, with card settlement taking place as a single credit to your bank account once a week, and cash then collected, counted and banked. Suddenly, reconciliation becomes much more time-consuming, laborious and complex – so why bother?

The purpose of arriving at a reconciled position is to confirmation that captured data in your books is fundamentally correct.

Gaps or mismatches, not only result in incorrect accounting records, leading to possible financial repercussions but also give way to other underlying issues. Internal theft or reduced revenue recognition may preside, which other organisation safeguards have failed to identify.

Additionally, from a compliance perspective, a fully reconciled position provides assurance to corporate customers and regulators (e.g. Audit) on the accuracy and robustness of your processes; something that is probably of importance to your stakeholders.