Reconciliation

Reconciliation means matching two sets of records of the same money, such as a company's bank statement and its own ledger, and explaining every difference between them. A ledger is the company's own record of every amount it has paid and received. If the two records agree, the company knows its books are right. If they do not, someone must find out why.

Here is how it works in general. Software takes the two records, line by line. It pairs each line in one record with the matching line in the other, using the amount, the date and a reference number. Lines that match are marked as cleared. Lines that do not match are listed as exceptions. A person then explains each exception. A payment may have arrived a day late, a bank may have deducted a fee, or an entry may simply be wrong and need correcting. At the end, the two balances must agree.

The matching is often harder than it sounds. One customer may pay three invoices with one transfer, or pay an amount slightly different from the invoice. Modern software uses rules, and now AI models, to suggest the right match. A person approves only the difficult ones.

Take, for example, a company claiming back the GST it paid on its purchases. GST reconciliation matches each purchase invoice against what the supplier reported in its own GST return, because the company can claim the credit only for invoices that match.

Consider a restaurant that sells through two food delivery apps. Delivery app reconciliation checks each weekly payout against the orders actually delivered, and finds the refunds that the apps deducted.

Say a bank moves its accounts to a new core banking system. After each batch, it reconciles every balance on the new system against the old one before switching anything off.

At a company's month-end, financial close software runs these checks for every account.

How is reconciliation different from settlement? Settlement is the money actually moving between banks. Reconciliation comes afterwards: it checks that every record of that movement agrees.