Legal Definitions - reconciliation statement

A reconciliation statement is a financial document that systematically compares two separate sets of records to identify, explain, and resolve any differences between them. Its primary purpose is to ensure the accuracy and consistency of financial data by detailing how discrepancies are accounted for or adjusted, bringing the two sets of records into agreement.

• Bank Account Reconciliation: Imagine a small business that tracks its daily cash transactions in an internal ledger. At the end of each month, the business receives a bank statement showing all deposits and withdrawals processed by the bank. A reconciliation statement would be prepared to compare the business's internal cash balance with the balance shown on the bank statement. This statement would list items such as outstanding checks (checks written by the business but not yet cleared by the bank), deposits in transit (money deposited by the business but not yet recorded by the bank), bank service charges, or interest earned. By detailing these differences, the reconciliation statement explains why the two balances don't initially match and confirms the true cash position.

• Intercompany Reconciliation: Consider a large corporation with several subsidiary companies. Subsidiary A might sell goods to Subsidiary B. When preparing consolidated financial reports for the entire corporation, it's crucial to eliminate these internal transactions to avoid double-counting revenue and expenses. An intercompany reconciliation statement would be created to compare the sales recorded by Subsidiary A with the purchases recorded by Subsidiary B for the same period. Any discrepancies, such as goods shipped by A but not yet received and recorded by B, or differences in pricing for internal transfers, would be identified and explained in this statement to ensure accurate consolidation of the group's financial performance.

• Vendor Statement Reconciliation: A manufacturing company regularly purchases raw materials from various suppliers (vendors). Each month, the company receives a statement from each vendor detailing invoices issued and payments received. The company also maintains its own internal records of purchases from and payments to these vendors. A reconciliation statement would be prepared to compare the vendor's statement balance with the company's internal accounts payable balance for that vendor. This statement might highlight differences such as an invoice the company believes it already paid, a credit note for returned goods that hasn't appeared on the vendor's statement, or a payment made by the company that is still in transit to the vendor. The reconciliation statement helps resolve these discrepancies, ensuring both parties agree on the outstanding balance.