Reconciliation is essentially a process wherein an accountant examines two distinct records and assesses the agreement's accuracy. It is a technique for verifying the accuracy, security, and consistency of the trading process. Reconciliation is carried out in order to safeguard firms against fraud and illicit trading practices. The system determines how frequently reconciliation occurs; it may be daily, monthly, or annually.

Examining some typical reconciliation cases in greater detail may help you comprehend account reconciliation. The following five categories of account reconciliation exist:

Trade Reconciliation, Position Reconciliation, P&L Reconciliation by Investor, Cash Reconciliation, P&L Reconciliation by Position.

Trade Reconciliation

Verifying daily deals against trade tickets, internal systems, external systems, etc. is the essence of trade reconciliation. The process of reconciliation makes that each trade is accurately confirmed and validated, ensuring the right impact on the P&L and balance sheet.

Position Reconciliation

Position reconciliation primarily involves checking positions against external parties, such as custodians, counterparties, etc., as of any given date. The reconciliation process guarantees that every trade is accurately reviewed and certified, resulting in the right impact on the P&L and balance sheet.

P&L Reconciliation by Position

One of the most crucial transaction position controls is carried out by the risk department and back office of the bank. The risk department and back office should daily compare the trader's net currency-wise exchange position reported by the front office system to the position reported by the back office systems. The front office should be informed of the position exceptions, and a solution should be found.

P&L Reconciliation by Investor

Usually, this reconciliation is done between the internal books and the fund administration books. Investors' P&L Reconciliation - This refers to resolving the P&L at an individual investor level.

Cash Reconciliation

Verifying a sale or transaction's accuracy throughout the company's financial systems is known as cash reconciliation. The accomplishment of it guarantees the revenue and cash balances.

The following are some of the best practices that can be used to ensure that reconciliation serves its purpose:

1. Companies should have an internal reconciliation process. It should provide information about the required frequency, standard formats, essential accounts for reconciliation, etc. These procedures will change based on factors like volume, industry, high-risk zones, etc. The Finance & Accounts team should receive regular updates on the policy preparation process.

2. The division of labour should be observed. It implies that workers who enter transactions into the books of accounts shouldn't participate in the reconciliation process. It will make sure that everyone double-checks each other's work.

3. To make individuals feel accountable, the preparer and checker should properly sign off.

4. To identify frauds and take prompt corrective action, strict deadlines for reconciliation completion should be established.

5. Correct accounts should be passed through rectification entries in the approval procedure. It will guarantee that middle and top management receives periodic updates.

6. The Reconciliation Statement that receives sign-off should include supporting documentation (such as bank statements, customer ledgers, etc.).

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