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Transaction reconciliation is the process of matching two different data sets at the transaction level. This allows companies to verify that transactions have happened appropriately.
In the context of the financial close, this is often associated with ensuring that the records and individual entries in a ledger are correct. A ledger provides a record of each transaction across the lifespan of a company. Each transaction within the ledger is also known as a “journal entry.”
Every transaction is supported by a related record or source document. For instance, employee expenses will have corresponding receipts, purchase orders will have corresponding invoices, and bank transactions will have corresponding bank statements. These transactions are all recorded in their respective ledgers.
The process of transaction reconciliation is crucial for identifying discrepancies or errors in transaction records and resolving them to maintain the integrity of financial data, successfully close the books, and accurately produce financial statements and documents relevant to the business. Transaction reconciliation is also an important part of helping businesses to detect and prevent fraud, prepare for annual tax filings, and comply with any necessary financial regulations.
Transaction reconciliation is generally performed before the close of any accounting period, including on a monthly, quarterly, or annual basis.
In the context of Modern Treasury, we think about transaction reconciliation as identifying and matching the record of a single financial transaction across systems. This includes ensuring transactions match across internal systems of record (i.e. sub-ledgers or homegrown systems) and external sources of truth (i.e. banks). At small volumes, it is equivalent to comparing every row in a spreadsheet of detailed transactions. Each transaction might represent a user payment, invoice, or trade that is reconciled between internal systems, payment processors, or banks, as well as every step in between.
What are the Different Types of Transaction Reconciliation?
Transaction reconciliation is a fairly generalized term that can refer to a wide variety of different types of reconciliation, including:
- Bank Reconciliation: Looking at bank transactions and statements (withdrawals and deposits, checks, electronic payments, etc.) and then reconciling those transactions against the business’ own ledger.
- Vendor Reconciliation: Comparing the transaction records of a vendor or supplier against the business’ own ledger.
- Intercompany Reconciliation: Reconciling statements and transactions between different entities within the same parent company.
- Business Specific Reconciliation: Looking at transactions for a specific business unit.
- Petty Cash Reconciliation: Verifying the accuracy of all transactions in a petty cash fund.
- Credit Card Reconciliation: Reconciling purchase receipts from a card company against internal purchase records for the given cards.
How Does Transaction Reconciliation Work?
Here are the typical steps for transaction reconciliation:
- First, all relevant transaction data is collected. This includes invoices, receipts, statements, and any other documentation related to the transactions that need to be reconciled.
- These transactions need to be matched against transactions recorded in the ledger. Often this is done manually, which is time consuming and prone to error.
- Discrepancies may arise due to mismatched time stamps, batched transactions, misallocated or incorrectly matched entries, or other forms of human error. These discrepancies need to be investigated to determine their cause. This may involve contacting the parties involved in the transaction or reviewing additional documentation. Once the cause is determined, corrective actions can be taken to resolve the discrepancies.
- After discrepancies are resolved, the transaction records are adjusted to reflect the correct information. This may involve updating accounting records, adjusting balances, or making other changes as necessary.
- Throughout the reconciliation process, detailed records should be kept of all transactions, discrepancies, and resolutions. This documentation is important for audit purposes and for maintaining a clear audit trail of all financial transactions.
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