Purpose of Reconciliation

A bank reconciliation is used to compare your records to those of your bank, to see if there are any differences between these two sets of records for your cash transactions. The ending balance of your version of the cash records is known as the book balance, while the bank's version is called the bank balance. It is extremely common for there to be differences between the two balances, which you should track down and adjust in your own records. If you were to ignore these differences, there would eventually be substantial variances between the amount of cash that you think you have and the amount the bank says you actually have in an account. The result could be an overdrawn bank account, bounced checks, and overdraft fees. In some cases, the bank may even elect to shut down your bank account.

Definition:

Reconciliation is the process of comparing transactions and activity to supporting documentation. Further, reconciliation involves resolving any discrepancies that may have been discovered.

Purpose:

The process of reconciliation ensures the accuracy and validity of financial information. Also, a proper reconciliation process ensures that unauthorized changes have not occurred to transactions during processing.

Concepts and Best Practices

Key Concept	Best Practice
Accuracy of activity: A good internal control system provides a mechanism to verify that transactions and activity are for the correct purpose and amount, and allowable.	For each type of activity consider documenting the particular information from source documents that is to be compared to the appropriate report. This assists to ensure that transactions are valid and are correct in purpose. (example: determine that for travel reimbursement source documents, the traveler name, destination, purpose of the trip, etc. will be matched to the monthly financial report) Ensure that transactions have been properly authorized. Especially, if the source documents are paper based, review for potential changes to the document between approval and processing of transactions. Ensure that all transactions are allowable. See more specific information: Budget Activity Reconciliation Process Guidelines
Error correction: Errors and discrepancies, intentional or unintentional, should be detected, investigated and resolved in a timely fashion.	Verify the recording of transactions in a timely manner. Review source documents to assure they are processed and posted in a timely manner by the processing department. If not, follow up with the appropriate central office or processing department. Document a plan for the research and correction of errors or discrepancies of each type of transaction or activity. Communicate these processes and procedures with the appropriate staff. Establish expectations for timeliness of error correction.
Matching to the source: The oversight of any transaction is strengthened by the process of matching source documentation of the transaction to the appropriate reporting documentation or reporting tool.
Documenting the process and completion: Reconciliation processes are most effective when they are consistent and thorough. Employees involved in the reconciliation process should be knowledgeable and clear on their responsibilities and expectations. It should be clear to an external reviewer when a reconciliation has been completed.	Be consistent with reconciliation processes. Changing the reconciliation process often leads to undiscovered inaccuracies and potential fraud. Reconciliation should be documented clearly to verify that a review has been done. The reconciliation process and procedures should be documented clearly and communicated. Consider documenting: The steps in the process Who performs each step Expectations regarding timeliness A mechanism for providing proof that all activity has been reviewed and reconciled A procedure for error correction.