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.
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.
Find the simplified reconciliation process below:
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.
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.
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.