Account Reconcilement Definition
The account reconcilement definition is the process of comparing a company’s account (or bank) statement with its own accounting data in order to detect any inconsistencies between the two. Account reconcilement inside organizations is essential for keeping track of any errors that may point out cash-leakage, miscalculations, or just an honest blunder.
Nowadays, we live in a world where the computer can complete many processes. As a result, automation is dominating accounting processes. Being that, discrepancies can be far less common between the two sources, helping institutions save both time and money.
Why Reconcile Accounts?
Now that we know the account reconcilement definition, we need to understand the reason as to why it matters to a company. Before account reconciliation became a norm, many companies asked “why reconcile accounts?”.
Account reconcilement should be a company’s main regulatory and compliance function. By reconciling accounts, you prove that account balances are parallel. This process confirms that the amount of money leaving is the same amount of money being spent.
Reconciling also helps prevent fraudulent actions and avoid financial statement mistakes. Furthermore, outside regulators find this process to be critical when conducting periodic audits of the company.
Simplified Reconciliation Process
Find the simplified reconciliation process below:
- First, gather all the necessary accounting information together
- Compare the company’s bank statement to the general ledger cash account
- Take note of all the items that remain in the company’s ledger, and add the pending deposits to the final balance
- If your have an interest bearing account, then add that as well
- Deduct any outstanding checks from your final balance as well as any bank errors (such as inaccurate deposits and inaccurate debits)
- Subtract bank service charges
- Finally, confirm that both statements – your bank statement and your recorded balance – are equal, as they should be
If there are any errors after you compare the two, then review each step. Make sure that everything is posted in the general ledger. And adjust you bank balance for all outstanding checks and pending deposits.
Sarbanes-Oxley and Account Reconciliation
On July 30th 2002, the United States Congress passed the Sarbanes-Oxley Act. Also refer to it as the”Public Company Accounting Reform and Investor Protection Act”. This helped protect stakeholders from the possibility of fraud. This bill was enacted after various major corporations had been discovered with huge accounting scandals, such as Enron and Worldcom.
It administered strict requirements to improve financial disclosure from firms and decrease the chance of accounting fraud. It consisted of the following 11 major elements:
- Public Company Accounting Oversight Board (PCAOB)
- Auditor Independence
- Corporate Responsibility
- Enhanced Financial Disclosures
- Analyze Conflicts of Interest
- Commission Resources and Authority
- Studies and Reports
- Corporate and Criminal Fraud Accountability
- White Collar Crime Penalty Enhancement
- Corporate Tax Returns
- Corporate Fraud Accountability
So how does Sarbanes-Oxley and account reconciliation relate? Sarbanes-Oxley set up the parameters for account reconciliation. Before, accounting standards did not hold corporations accountable to best practices. However, companies are now required to certify its internal controls – changing their common audit procedures.