Account reconciliation in accounting is the process of contrasting and comparing two sets of records to ensure that the statistics match. Frequently, the source papers for reconciliation are:
- Internal: company-generated records
- External: information obtained from a third party
This procedure ensures that general ledger entries are consistent with the respective subledgers. Unexplained differences in a company’s financial records can indicate major issues such as fraud or theft. Your accounting team must balance the books correctly. Otherwise, you’ll miss out on detecting problems early.
Every organization has its own set of rules and regulations governing the frequency with which it performs reconciliations. This process can occur daily, monthly, or annually, depending on the number of transactions to compare.
Account reconciliation can be a time-consuming and laborious task. That is why many businesses rely on accounting software to manage this so that they can focus on more strategic issues.
This article will teach you all you need to know about account reconciliation. Accounting reconciliation (with examples!), why it’s essential, the distinctions between human and automated account reconciliation methods, and much more are covered.
what is accounting reconciliation?
Account reconciliation appears different at each firm. Most businesses, however, use double-entry bookkeeping. As per generally accepted accounting principles (GAAP), this entails that they record transactions in the general ledger in two parts: credit and debit accounts.
When your company makes a sale, the balance sheet will debit cash or accounts receivable (AR), and the income statement will credit revenue. When your business makes a transaction, the cash utilized is noted as a credit in the cash account and a debit in the account of assets.
type of account reconciliation
Account reconciliation can be classified into five types:
- reconciliation of bank
This form of account reconciliation refers to the procedure by which a corporation compares its bank account balance as stated in its books to bank statements from its financial institution.
Businesses can perform bank reconciliations as frequently as necessary to ensure consistency across these documents.
- reconciliation with customers
A company will compare its exceptional customer balances to the accounts receivable entered in the general ledger to uncover any inconsistencies in customer-level accounting.
Before producing monthly financial statements, businesses often do customer reconciliation. The customer reconciliation statement proves that there are no major discrepancies in the accounts.
- reconciliation with vendors
In this situation, a corporation will compare the accounts payable recorded in its books to the sum presented in vendor paperwork.
This ensures that there are no significant inconsistencies between the price a vendor charges and the goods and services received by the organization.
- reconciliation of intercompany
This form of reconciliation occurs when a parent firm combines all of its subsidiaries’ general ledgers in order to eliminate intercompany flows and reduce bank transaction fees.
This procedure aids in identifying anomalies between subsidiaries and unrecorded transactions or balances on group firms’ books.
- reconciliation unique to the business
This refers to any additional reconciliations a corporation must perform depending on specific requirements. For example, Businesses with a field sales team may reconcile employee expenses payable with individual expense reports.
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how does account reconciliation work?
Account reconciliation aims to verify that cash inflows and outflows (debits and credits) always match.
Finance departments can easily reconcile accounts by updating cash flow statements with specific transaction information. They often reconcile accounts indirectly by examining the sum of these transactions in their income and balance sheets.
There are two methods for going through the account reconciliation process. Your individual accounting reconciliation requirements will determine whichever option is ideal for you.
- review of documentation
This is the most commonly used form of account reconciliation. It entails reviewing each transaction to determine if the amount captured matches the amount spent.
Documentation evaluation is more accurate because it is based on actual data rather than estimations.
- analytical evaluation
Fiurin Estimates of historical account activity levels and other indicators are used in this reconciliation procedure. This is a statistical method that will assist you in determining whether disparities between accounts are the result of human error or potential theft.
the steps involved in the usual account reconciliation process
Account reconciliation ensures the accuracy and integrity of your financial data. Nowadays, the majority of businesses utilize accounting software to record all transactions and reconcile any differences between their books and supporting financial statements.
Accounting teams must take considerable care to minimize errors while manually reconciling accounts.
The following is a breakdown of the steps in this process:
- Contrast your bank statement and cash book statement.
- Keep a record of any payments that appear in the cash book but not on your bank statement.
- Keep an eye out for discrepancies between transactions on your bank statement and your cash book.
- Review the bank statement for potential problems and report them.
- Check that the balance in both documents is equivalent.
5 reasons why account reconciliation is required
Businesses would struggle to discover and prevent balance sheet problems without account reconciliation, which could raise concerns in the event of an audit. They would also have a more difficult time identifying suspected cases of fraud or theft.
Companies can execute accounting reconciliation as frequently as they wish, but most prefer to do it monthly after financial closure.
Account reconciliations are required in the accounting process for five reasons:
- getting rid of accounting inaccuracies
Account reconciliation allows you to discover and correct any problems, such as misapplied payments.
- making all required business deposits on time
When you have all your information straight, you are less likely to miss deposits or overdraft an account due to a lack of funds. You’ll know exactly how much money to set aside for vendors, running Costs, and other expenditures.
- detection of unlawful transactions
Knowing where your company’s finances flow will help you spot unusual transactions. Neglected accounts may allow your team members or third parties to conduct fraudulent transactions.
- keeping track of expenses
Reconciliation is vital for tracking how much money the company spends each cycle and preventing surprises.
- accounting for bank fees and other taxes
In some circumstances, bank fees and taxes might generate balance-sheet difficulties. Reconciliation allows you to detect these circumstances and deal with any discrepancies.
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3 common causes of account reconciliation issues
Exceptions are to be expected in your accounting ledgers. However, if they occur frequently and cannot be explained, it may signal that something is wrong with your books.
When you see major differences in your company’s financial accounts, it’s time to investigate further. Before you jump to conclusions, look for any missing facts or inaccuracies.
If there are still differences after making the appropriate modifications, an audit may be necessary to rule out fraud or hold the guilty parties accountable.
The following are the three most common sources of reconciliation discrepancies:
- distinctions in timing
These inconsistencies occur when timing concerns force you to gather supporting data for a reporting period different from the activity in the general ledger.
- transactions that are missing
These inconsistencies occur when you fail to record a few general ledger entries but include them in other statements.
- errors
These disparities occur when human error (such as poorly entered information) results in inconsistencies between the general ledger and the subledgers.
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manual account reconciliation vs. automated account reconciliation
Some businesses execute the account reconciliation process manually. The success of this strategy, however, may vary. Human error is more likely in manual reconciliation.
As a result, businesses cannot determine whether all of the transactions in their statements are correct or need to be revised further. Furthermore, manually reconciling your accounts could take a few business days to several weeks, depending on the size of your company, the frequency of your reconciliations, and the number of transactions flowing through your firm. That is why, in most circumstances, manual reconciliation is less than optimal.
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software for account reconciliation
Account reconciliation software generates high-quality, precise financial statements. It streamlines and automates the reconciliation process.
It improves financial close accuracy by giving accountants a streamlined way to verify the correctness and appropriateness of their balance sheets.
It is a rapid and efficient method for comparing general ledger, bank, and financial statements, investigating inconsistencies, verifying supporting paperwork, and taking necessary steps.
This eliminates the time-consuming effort of manually reconciling everything and allows accountants to focus on examining inconsistencies.
Account reconciliation software has the following features:
- Reconciliation templates
- Checklists to standardize operations
- Automated review and approval workflows
- Easy review and auditing
- Integrated storage of supporting documentation
- Links to applicable policies
audit benefits of account reconciliation software
The following are some of the key advantages of automating reconciliations:
- financial closure time
Automation allows you to shut down considerably more quickly than firms that rely on manual labor. With automation, any company can close in a short time.
According to data, more than 80% of businesses can complete monthly tasks using reconciliation software in four to six working days.
- standardization
Companies can automate their month-end and quarter-end processes because reconciliation software standardizes them. This means you’ll be able to close more quickly, and your team will have more time to focus on other duties.
- human reduction error
Human error causes unavoidable mistakes, which waste time. This procedure is streamlined through automation, and manual entries and human errors are minimized.
Account reconciliation and transaction comparison also assist your accountant in producing dependable, accurate, and high-quality financial statements because your company’s balance sheet displays all money spent—whether cash, credit, or loans—and all assets purchased with those funds. The accuracy of the balance sheet relies heavily on the accuracy of your company’s financial reports.
how will countick assist you with account reconciliation?
Countick can assist you with automation. You can take control of your financial reporting while focusing on your company’s growth and scaling. With Countick, you can get exceptional accounting services for small businesses.
You’ll also be able to close monthly transactions faster than ever before. You’ll also be able to estimate cash flow more accurately and efficiently.
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In addition, if you have an accounting integration like Xero or QuickBooks, you can handle your reconciliation quickly. Automatic reconciliation saves time and helps you align your books with your accounting software.
