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Reconciliation of Books | Definition | 5 Types of Reconciliation - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
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clicking the bell icon friends today we have we're
going to learn a concept which is known
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as reconciliation of books what are the
types and what are the best practices
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that can be adopted over here now
remember one thing that reconciliation
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of book as we all know that you know
books of accounts are the blueprints of
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any business so maintaining this kind of
books of accounts is the key to
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financial management however you know
maintaining a books of account is
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actually not enough it is also this is
necessary that the account should be you
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know this kind of account actually
should be accurate enough and and the
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most important thing it should be
complete so there are various checks and
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controls possible to ensure that you
know this is but one of the most basic
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and essential way is which we call as
the Rico of books or known as the
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reconciliation of the books so first in
the foremost thing we need to understand
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what exactly is the reconciliation see
it is the process which compares two
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sets of Records okay and analyzes the
difference between the two sets if any
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right now this two sets of records can
be anything from the entire gamut of the
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books of accounts generally the one set
of the record is known as a ledger is a
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ledger from the company's books okay
itself which needs to be reconciled and
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second set okay is obtained from the
internal and the external sources this
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is the second source example you know
comparing the bank book internal source
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reserve is you know the bank statement I
am talking about the bank book which is
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your internal source right
and the bank statement
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right so this is your what we call as
the external source so this is the
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difference that I wanted to show you I
hope you guys have a clear idea on this
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now when exactly this reconciliation is
done now the question is when the first
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thing that we learned was what exists
what is reconciliation now when now it
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is generally carried out before the
closure of the books of accounts or the
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closure of the you can see accounts
right so it is advisable to do it on on
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or like you know monthly basis so that
you know the books are up to date but
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they can also be done on what early or
maybe on annual basis it's completely
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fine now remember one thing if you can
say that you know heavier the volume
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heavier the volume more should be the
frequency of the reconciliation so that
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you know the reconciliation solutions the
process is smoother and they should be
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done on annual basis before the books of
accounts are certified by the auditor in
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fact you know most of the
reconciliations are prerequisite for the
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audit testing purpose like since the
enactment of the Sox Act that is the
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saab ins Sabinas Oxley act in 2002
reconciliation have become even more
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important as compliance required have to
have have a Verizon two different
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actually leveled so now they have to
complain that what is the period for
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which the reconciliation has to be done
right what is the period for which the
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reco has to be conducted now this is the
next question we are dealing with see
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one of the key aspect to take care while
performing the reconciliation is that
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the period of both the sets of Records
should be the same so in continuation
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with the example stated you know it is
very illogical to compare the bankbook
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extracted from the period let's say from
1st of Jan 2016 to 31st of March or 2016
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- the bank statement for 1-01-2016
to 21-06-2016 right it is really
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logical to compare this to values over
here to 30 let's say 30th of June 2016
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there should be a common base
for comparison you can't compare this
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rate so on and also you know a very
important thing to consider that you
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know the opening and the beginning
balance should always be equal for both
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the sets of records now in the in this
case if the balances on the first June
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2016
the first Jan 2016 are not equal then
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this difference should be first be
rectified rather than just going ahead
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with the reconciliation from 1-01
2016 to 31-03- 2016 right now why
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should why we should perform this okay
it is force to detect the fraud this is
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the first and foremost reason
see it is easy to completely manipulate
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the books and one way to do that is by
you know one of the way of detecting
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fraud is through the reconciliation solution so
let's understand you know this with an
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example let's say there is a cashier of
ABC corn okay and he is committing some
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fraud by not recording cash receipt from
the customer by doing this the customer
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and the cash Ledger's are completely
unchanged and he can pocket the cash
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receipt a simple way to detect fraud
like this is to perform a customer
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ledger reco okay now with this when the
customer ledger in the books of accounts
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of ABC is compared to the ABCs ledger in
the customers book the balances will not
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tie and the fraud will be absolutely we
we detected right I'll show you one
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picture of that you see the picture
before the reconciliation process was
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implemented he was for cutting all the
gas the customer pays the cash there's
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no entry in the books and he's pocketing
all the cash the cash uh pockets the
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cash and gets away with the fraud now
after the reco process is implemented
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entry is found missing while the
reconciliation of the customers ledger
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so absolutely he has been showed the the
door of the company you're fired as
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simple as that
okay this was on the front part now the
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second reason okay that is why is to
ensure the records are absolutely
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complete this is the second reason see
at times there are certain activity that
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affects our books of account but not but
not being routed through the accounts
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and demon hence you know it may go
undetected
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so that can be the thing now a small
example is like you know a checkbook a
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cheque which is deposited by customer
directly in the bank account and if the
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customer does not inform the bank ledger
as well as the customer ledger will be
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incomplete leading to misrepresentation
of the facts now I'll explain you what
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are the types of the of rico's that have
been done the first of the basic you
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know reconciliation that have been done
for the bank Rico that is the bank
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reconciliation statement which is very
famous a bank Rico is the statement you
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know is prepared with reference to the a
bank reconciliation statement is
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prepared you know with reference to the
actual transaction that has been
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reflected in the bank statement
vis-a-vis the transaction recorded in
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our books so that is related to the bank
Rico then we have vendors Rico a vendor
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reconciliation statement is basically
prepared to make sure that the
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accounting entries are passed in the
books of the vendor are in line with the
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accounting entries that are passed in
the books okay the third type is what is
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we called as the customer Rico the
customer reconciliation statement a
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customer Rico is basically the statement
is very similar to the vendor Rico and
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it is prepared to check if the
customer's books are in sync with the
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with our books that is the company's
books and most corporate treat a
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customer Rico as the priority over the
vendor Rico and this is because the
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money is receivable from the customer
and it is always better to reconcile so
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that the payment are not pending on
account of some issue with regarding to
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the accounting entries and the fourth
type that we have is the intercompany or
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Rico intercompany reconciliation now the
group companies like holding subsidy or
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have to have to prepare Theseus
consolidated financial statement that is
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a CFS and for this it may be coming it
positive it most important that their
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books of accounts are always in sync and
hence should be reconciled regularly
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before the consolidation process is
actually been done the fifth type that
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is the business what we call as business
specific Rico now in this type of Rico
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every business will have to prepare the
other reconciliation over and above the
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basic ones mention about and an example
for this is like you know the cost of
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goods sold Rico this Rico will not be
applicable to the service industry as
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they do not hold inventory so however it
is important for the business which
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holds the inventory
now finally let me run you through the
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useful tips for ms excel while
performing the Ricoh you know the first
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and the foremost step is like you know a
standardized template all right for you
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to template should be prepared with all
the key formulas in the excel template
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is really very important like formulated
as an Illustrated or template is really
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important now in case of the vendor or
customer Eco invoice number acts as a
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common field which can be taken as the
base for performing the vlookup function
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and making the Rico process much easier
with it make sure to do the Pay special
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after using the Excel vlookup function
and the third in the last thing filter
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out the debit and the credit entry
separately and reconcile them
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individually okay another way to
separate out the entries is to filter
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them out on the type basis okay that is
by payment invoice or it can be your
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other adjustments you can see that all
and Enrico reconsider reconciling this
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separately and then adding up the
differences will prove to be really
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helpful so that's it for this particular
topic if you have learned and enjoyed
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Cheers
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