Reconciliation
The process of comparing two sets of records or figures to ensure they are consistent and identify any discrepancies.
What is Reconciliation?
In accounting, reconciliation is the process of comparing two sets of financial records to confirm they are consistent with each other — for example, matching a company's internal cash records against its bank statement, or reconciling GAAP net income to non-GAAP adjusted income. Bank reconciliation is one of the most fundamental internal controls, catching unauthorized transactions, timing differences, and errors. Financial statement reconciliation is required by the SEC when companies present non-GAAP metrics, ensuring investors can trace the difference between GAAP and adjusted figures. Reconciliation is also a key step in month-end close processes and is essential for producing reliable financial statements. Unexplained reconciling items are often the first sign of accounting irregularities.
Example
The SEC requires every earnings release containing non-GAAP metrics to include a reconciliation table. When Netflix reports 'adjusted EBITDA,' it must show a table tracing from GAAP operating income, adding back stock-based compensation, depreciation, and other items, so investors can understand exactly what is being excluded.