Reconciliation

Reconciliation is an accounting term that refers to keeping financial or other records in balance, in agreement, and accurate. The reconciliation method is often used in maintaining business records to ensure that the amount of money going out matches what is recorded as spent. Reconciliation also applies to personal financial records, as it is used to balance the family checkbook. The term reconciliation does not only apply to finances, however, as it is also used in the medical field. To explore this concept, consider the following reconciliation definition.

Definition of Reconciliation

Noun

1. The act of making one view compatible with another.
2. The act of making financial accounts consistent with one another.

Origin

1300-1350        Middle English    reconsiliacioun

What Is Reconciliation

In simple terms, reconciliation is the comparing of two or more sets of records to make sure they are accurate and in agreement with one another. This is often done on a regular basis to ensure financial books are balanced. For example, Bob, who owns a bike shop, maintains a petty cash box with $500 for small expenses that may come up for which his employee needs to pay.

Each week, Bob reconciles the cash box with the records of expenses paid out of it. If one week, the box contains $317, and the records inside show that only $83 was spent, the records do not reconcile, and Bob will need to track down the missing $100. Being lax or negligent about reconciling financial records can lead to missing money, or even allow fraud to go on undetected.

Account Reconciliation

Account reconciliation should be done on a regular basis to ensure that financial reporting is continuously accurate. For individuals, this may require reconciling checkbook and credit card accounts each month by comparing receipts with a bank or credit card statement. This makes it possible to catch potential credit card or bank mistakes, determine whether money is being withdrawn illegally, and gives individuals a view into their spending habits, and provide a realistic view of how much bank or credit card fees actually cost. Account reconciliation is useful for individuals and businesses set a budget that is realistic to their financial resources and individual needs.

For businesses large and small, account reconciliation is vital to protecting against fraud, such as embezzlement. While individuals find they are able to reconcile their accounts with paper and a pencil, larger financial endeavors find that using accounting software makes the job much easier. Large discrepancies in a company’s accounting not only affect the business’ bottom line, but it may have serious legal ramifications.

Cash Reconciliation

Cash reconciliation is an accounting method in which ledgers are reviewed by the company accountant in order to determine where cash is being moved, and how much cash is on hand. On average, two different cash reconciliation methods are used.

Traditional cash reconciliation involves a review of bank statements, comparing them to the company’s cash account. Depending on the company’s needs, traditional reconciliation can be done monthly, or may be done daily. If discrepancies are found, transactions are researched going backward, to determine where the discrepancies began.

The second method, cash flow statement reconciliation, is more involved, requiring a review of individual transactions taking place each month. The cash flow reconciliation method is commonly used by businesses trying to determine how much cash is being generated.

When using either method of cash reconciliation, three primary concerns require special attention:

• Operating – all cash that flows from the company’s normal daily business, including cash receipts, sales of goods and services, and interest and dividends received. The operating classification also includes bills paid, interest paid out, and payroll.
• Investing – money going out for the purpose of increasing the company’s income. This includes the sale of assets, loans made to suppliers or customers, and payments made to acquire something of value to the company.
• Financing – all cash coming in from long-term investments, including debt securities and equity.

Reconciliation of a Cash Register

In addition to the method of cash reconciliation for large-scale accounting, cash reconciliation is performed daily, or even several times a day in a business that maintains a cash register. Register reconciliation may be performed at the beginning and end of each shift, which makes it easier to pinpoint which employee is having a problem, if there are accounting discrepancies. Cash drawer reconciliation is a simple process:

1. Count and record the amount of money in the cash drawer at the beginning of each shift
2. Count and record the amount of money in the cash drawer at the end of each shift, including coins
3. Count and record all checks or credit card slips accepted at the end of each shift, adding that total to the cash total
4. Take special note of any over-rides or voided transactions
5. Add together the total of cash, checks, and credit card slips, then subtract amount that the drawer started with
6. Compare this total to the register report of sales

The numbers should match. Commonly, when there is a substantial difference, voided transactions or over-rides are the reason. The discrepancy must be tracked down so that the cash can be reconciled.

Bank Reconciliation

A bank reconciliation is the process by which an individual or entity verifies that the account statement received from the bank matches the individual’s or entity’s checkbook register or account records. Reconciling one’s bank account can be done at any given time, but is commonly done on a monthly basis. When initially comparing the bank’s account statement to the checkbook register or other account records, there may be quite a difference. This is most often because, on the date of the reconciliation, deposits have been made, or checks written and outstanding, since the date the statement was printed.

Reconciling a bank account then entails adding additional deposit amounts, then subtracting any outstanding checks or other payments. The resulting total should match the total on the bank statement. On occasion, discrepancies may occur due to accounting or calculation errors, whether on the part of the bank, or the account owner. In order to prevent large discrepancies from developing, and to ensure bank reconciliation is not a huge task, most accountants advise people and entities to reconcile their accounts at least monthly. Today’s technology makes it possible to perform bank reconciliation through accounting software.

Example of Bank Reconciliation

John’s company receives a bank statement, which is dated March 1st, and shows a balance of $24,594. John’s cash records March 1st show a balance of $23,196. To determine whether there is really a discrepancy, John must determine which checks are outstanding, and whether any deposits are pending. John looks over his records and finds outstanding checks as follows:

• 2009 for $300
• 2010 for $200
• 2011 for $898

After subtracting the amount of the outstanding checks from the bank statement total, John finds that the total is indeed correct. If the numbers did not add up, John would have to dig further to determine where the true discrepancies lie.

When reconciling a bank account, other factors should be considered, including:

• Credits, such as deposits and reversed charges
• Fees, such as for insufficient funds
• Any other fees a bank may charge on a regular basis
• Interest, if the account earns interest

Failing to take these factors into consideration can lead to large discrepancies between bank statements and accounting records.

The Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 was enacted to set standards for public companies and public accounting firms. The Act is officially termed the “Public Company Accounting Reform and Investor Protection Act,” and commonly referred to as “Sarbanes-Oxley,” or “Sarbox.” The goal of Sarbox is to help prevent fraudulent activities from taking place within both public and private corporations and accounting firms.

Sarbox was enacted amid public clamor about such major corporate scandals as Worldcom and Enron. Sarbox requires senior management to certify the accuracy of reported financial statements, and requires an overhaul of how internal controls are maintained. Sarbox also adds criminal charges and penalties for accounting and financial misconduct, and for knowingly falsifying, altering, concealing, or destroying any documents or records for the purpose of influencing an investigation into fraudulent accounting methods. Such penalties range from fines to imprisonment up to 20 years.

While Sarbox has plenty of supporters, opponents filed a lawsuit in 2006, challenging the constitutionality of the Act. In the case of Free Enterprise Fund v. Public Company Accounting Oversight Board, the plaintiff argued that members of the board appointed to oversee Sarbox should be appointed by the President of the United States, rather than by the Securities Exchange Commission (“SEC”).

The case made its way to the U.S. Supreme Court, which ruled on June 28, 2010, that the section of the Sarbanes-Oxley Act that governs appointments is in violation to the Constitution’s mandate for separation of powers. As of 2015, Sarbox remains an operative law pending corrections.

Medication Reconciliation

Reconciliation is not only an important process for accounting purposes, but is a vital element of working in the medical field. Medication reconciliation is the process of creating a comprehensive list of every medication a patient takes, for the purpose of preventing adverse drug reactions. Studies show that hospitalized patients are subject to at least one medication error each day. This is a serious threat to patient safety.

Medication reconciliation is an important step to preventing errors that may cause drug interactions and overdoses. In a medical setting, medication reconciliation should be performed at each transition in patient care, from admission, to shift change among nursing staff, and being treated by a new doctor. In some nursing home or rehabilitation facilities, medication reconciliation is done only weekly, but many medical professionals feel it should be done daily. Reconciling a patient’s medication requires five steps:

• Making a list of the patient’s current medications
• Making a list of medications that need to be prescribed for the patient
• Comparing the first two lists
• Making a decision based on the comparison
• Communicating with caregivers and the patient regarding information obtained from this process

Most physicians and healthcare facilities require that medication reconciliation be carefully documented at all times.

Related Legal Terms and Issues

• Equity – The monetary value of a property or shares in a company after all debts have been paid.
• Expenditures – The amount of money spent on supplies or other items or services.
• Fraudulent intent – A false statement or deceptive act made with the intent to deceive the victim.
• Negligent– Failure to act as, or to exercise the level of care of, another reasonably prudent person would be expected to act.
• Separation of Powers – Separating the powers of the three branches of government.