You will hear about reconciliations in any accounting role. But what is a reconciliation, and why is it important?
A control account is an account that is used to check the figures, and is the basis for reconciliation in accounting. It summarises information, and the balance can be cross checked. Examples of control accounts include the bank control account, the debtors control account, the VAT control account, and the wages control account.
Other documents will be checked against the balance on all of these accounts, as follows:
- The bank control account will be checked against the bank statement
- The VAT control account will be checked against the VAT return
- The debtors control account will be checked against individual customer accounts
- The wages control account will be checked against the amount paid in wages
Reconciliation is the cross check accounting staff perform to ensure the figures are accurate, and that there are no errors or missed entries. It ensures that all items in the bank statement are entered, all items on the vat return are entered, all items in the payroll are entered, and all customer balances are entered into the accounts. If this is happening, the accounts are accurate.
If we look at the bank control account for example, the closing balance on the bank statement should be the same as the closing balance on the bank statement. If it isn’t, you need to know why. A reconciliation is performed to identify any differences, and allow them to be investigated further.
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How reconciliation works
The reconciliation is a ticking exercise where you tick the bank statement to the bank control account. Any items that are on the bank statement but not on the control account will need to be written in. Any items that are on the control account but not on the bank statement need to be identified as either payments or receipts that still need to clear the bank. Also, any items that are written in the control account at the wrong amount will need to be corrected.
I have always seen a reconciliation as like a game of pairs. When you see the item on both documents, you tick them as you have a matching pair. Once the ticking exercise is complete and the control account is updated the final reconciliation can be written. The final reconciliation for a bank account will tell you:
- The bank statement balance
- The payments that are still to go out of the bank (these need to be deducted from the balance)
- The receipts that are still to go into the bank (these need to be added to the balance)
- The balance of the control account (this should be the same as the above sum)