The most crucial step in accounting is reconciliation, which ensures that the figures in your financial records are accurate. The reconciliation process, however, is something that isn’t really covered in accounting classes. If they learn it at all, most people do so on the job. It’s entirely possible to work as an accountant for a very long time and never perform a single reconciliation or take part in a financial close.
Account reconciliation is described as “an accounting process that compares two sets of records to ensure that figures are accurate and in agreement” by Investopedia. Account reconciliation also verifies the consistency, accuracy, and completeness of the general ledger accounts. “Reconciliation allows you to verify that your financial data is accurate and complete.
Internal balancing is the very foundation of double-entry accounting. Each entry must have debits and credits that equal. Accounts on the balance sheet and the income statement are divided up according to transactions that have an impact on a company’s bottom line, or net income. This means that something on the income statement may change as a result of journal entries that affect accounts on the balance sheet. You’ve nailed net income once all the balance sheet accounts have been reconciled.
Although it may seem obvious, doing so is crucial to ensuring that the accounting records are accurate. Reconciling accounts is central to the month-end close process. The financials are accurate every month because of this, or at least they are materially correct. Balance sheet reconciliation ensures that net income is correct.
Public companies have been required to have adequate internal controls to prevent material misstatement since Sarbanes-Oxley took effect in 2006 One type of internal control is the regular performance of balance sheet account reconciliations and the review of those reconciliations. Reconciliation reports will always be requested by auditors as part of their PBC requests.
However, even if you are exempt from Sarbanes-Oxley, timely account reconciliation, particularly for cash accounts, can help prevent fraud. Small businesses have been known to lose tens of thousands or even hundreds of thousands of dollars due to embezzlement. If the bank accounts had been regularly reconciled, many of those thefts could have been stopped in their tracks right away.
Timing differences. There are times when a payment or deposit you record in your accounting software doesn’t appear on your monthly bank statement. This was a much worse issue back when paper checks were the primary method of payment for suppliers and employees. However, due to today’s nearly instantaneous communication of financial transactions, the time it takes money to move from one account to another may only be measured in minutes or hours as opposed to days or weeks.
Mistakes. Have you ever fat-fingered a number or transposed the digits? Or maybe the transaction hit the wrong account. Perhaps there is a formula error in the Excel spreadsheet you used to calculate the journal entry. Or it could be a bank error. Every business will experience some or all of these at some point in its existence. However, if you don’t regularly reconcile your accounts, you might miss errors as they happen.
Fraud. This is the one that keeps entrepreneurs, financial experts, and accountants up at night. While some thieves are truly evil geniuses at covering their tracks, the majority of thieves aren’t that cunning. Many fraud cases can be prevented by paying close attention to the details and having someone who isn’t involved with that account review the reconciliations.
Consider that you have been lusting after the newest model widget polisher for your company. You can purchase this luxurious $12,000 machine for only $8,000 today thanks to a special offer from the neighborhood dealer. You have $10,000 in the bank, according to your online bank balance, which you use to keep track of your cash flow since your accounting software never seems to be quite current. You happily sign the contract and leave with your new widget polisher.
Later that day, your bank urgently texts you to let you know that your account is $5,000 overdrawn. Wait, what? You then recall the $7,000 check you wrote to a vendor last month. You would have been aware of that check and would have known to keep an eye out for it if you had regularly performed bank reconciliations. You can monitor your cash flow with reconciliation to ensure you have enough to meet your business needs.
Who: A person who is familiar with the types of transactions that pass through an account but is not the person who records those transactions is the best choice. The best way to spot errors is with a fresh pair of eyes, in addition to the internal control benefit of separating the recording and reconciling responsibilities. However, in very small organizations, that might not be possible.
What: Every balance sheet account with a significant balance should generally be reconciled on a regular basis. Every account can be reconciled in a flash thanks to account reconciliation software like AutoRec, and some of that can be done automatically. But at the very least, accounts for cash, bank loans, and credit cards ought to be regularly reconciled. Intercompany transactions will need to be reconciled by businesses with multiple entities as part of the consolidation process.
There are various approaches to reconciling your accounting records, and the most effective one will depend on the type of account you’re resolving. However, for all techniques, the first step will probably be importing account transactions from your ERP or accounting software into an Excel spreadsheet if you’re not using reconciliation software.
How To Do A Bank Reconciliation (EASY WAY)
What is the difference between personal and business reconciliation?
Although many business owners regularly reconcile their accounts to ensure they have a clear understanding of their finances and can prepare their records for audits, individuals can also use the process to review their own personal finances. The main distinctions between personal reconciliation and business reconciliation are as follows:
Personal reconciliation
Personal reconciliation involves comparing financial records, such as receipts, to external statements from banks, credit card companies, and other financial institutions to make sure they line up. They can verify the correct amounts of money are entering and leaving their accounts in this way. People can perform reconciliation to see if financial institutions made mistakes in their accounts, if vendors overcharged them, and if there were any fraudulent withdrawals of money. They can also comprehend a broad overview of their spending patterns.
A person may want to check the accuracy of the following personal financial transactions:
Business reconciliation
Typically, business owners’ financial situations are more complicated and unique than most people’s personal financial situations. Business owners reconcile their finances by comparing their internal books or general ledger to external bank and other financial institution statements to make sure they are in agreement. To do this, they frequently employ accounting software or an accountant, which can facilitate and accelerate the process.
By performing reconciliation, business owners can make sure all of their transaction records are accurate and, if necessary, change their journal entries. Additionally, they can verify the veracity of their financial records, such as income statements, balance sheets, and cash flow statements. Account reconciliation typically has three main purposes for business owners: making sure their financial accounts are error-free, looking for fraud, and getting their records ready for auditors.
A business owner may want to confirm the accuracy of the following financial transactions:
What are reconciliation accounts?
The two financial accounts used in the account reconciliation process are known as reconciliation accounts. In this procedure, a business owner or accountant contrasts external financial records from third parties, such as banks and credit card companies, with internal financial records from their company’s general ledger. To ensure that the data and balances on both accounts are accurate, they examine deposits and withdrawals. This allows business owners to verify that their financial records are complete and accurate and to determine how much money they have.
While an individual performing account reconciliation can anticipate some discrepancies between internal and external records due to things like delayed deposit times and unpaid checks, if they find an unexplained difference it may be a sign of an error or fraud. Business owners can frequently find the cause of discrepancies between accounts and fix them by identifying them. They might need to inform another institution of the issue, make a payment request, and make necessary record-keeping corrections. A business owner explains everything they discovered in an account reconciliation statement after conducting reconciliation.
What are the benefits of account reconciliation?
Account reconciliation aids both businesses and individuals in identifying errors and instances of fraud. Timing issues like unpaid checks and late payments may be the cause of some discrepancies between accounts. They could also be the result of bank fees, such as check printing and ATM service fees. However, account reconciliation is useful to identify the following problems:
The success of a company is impacted by account reconciliation because it allows owners to verify where their money is going. It can also assist a business’ accountant in producing thorough financial statements for the company, which inform stakeholders of the overall financial performance of the company. For instance, balance sheets show the cash invested in a business and the assets that were acquired with that cash. Businesses may occasionally be required to reconcile their accounts in order to avoid auditor fines. Businesses can report errors in account reconciliation promptly and save money by spotting them.
How do I reconcile my accounts?
Here are some steps for reconciling your accounts:
1. Compare internal accounts to external ones
Account reconciliation begins with a comparison of your internal and external financial records. For the general public, internal records may refer to personal spending logs and shopping receipts, but for businesses, it typically refers to a general ledger. Bank statements, credit card statements, and other financial records provided by third parties are examples of external records. Make sure the amount you have spent matches the amount recorded by going over each transaction on the pertinent documents. The values can be compared, and any differences you find can be noted.
2. Find and correct any discrepancies
Finding the reasons for each difference can then be done after comparing the reconciliation accounts and noting any discrepancies. Allow enough time for specific transactions to appear on your bank statements. For instance, it might take longer for your bank to process a check you wrote in the final days of the month. It’s possible that you, a vendor, or your bank made a mistake in relation to some differences. If you’re unsure about a charge, you might want to call the vendor or your bank to double check it.
3. Consider using the analytics approach
In addition to the documentation review approach, there is another approach to account reconciliation known as analytics review. In this method, business owners estimate the amount of money that should be in their accounts based on their prior account activity. To check for possible bookkeeping errors, compare the amount in your account with the anticipated revenue.
4. Try the double entry-accounting method
Another type of account reconciliation uses the double-entry accounting method. In double-entry accounting, each transaction that a company has is recorded in their financial records as both a debit and a credit. For instance, when a sale is made, the company can record it as a credit in the sales revenue account and a debit in the account for accounts receivable. The credits and debits always sum to zero.
A method of reconciling your accounts is to make sure that the credits and debits in your accounts equal out. Businesses can produce a balance sheet and income statements and avoid bookkeeping errors by performing this kind of reconciliation. For the purpose of producing reconciliation reports and other crucial financial documents, it is crucial for a business to maintain thorough records of every transaction that takes place.
FAQ
What is a reconciliation account?
Understanding the differences between two financial records, such as a bank statement and a cash book, is made easier by reconciling an account. Reconciliation verifies that the recorded amount leaving one account and the recorded amount spent in another account are the same.
What are the 3 types of reconciliation?
- Credit card reconciliation. Credit card reconciliation is similar to bank account reconciliation.
- Balance sheet reconciliation. …
- Cash reconciliation.
What accounts do I need to reconcile?
Since the balances of all asset, liability, and equity accounts may persist for years, an account reconciliation is typically performed for each of these accounts. Reconciling a revenue or expense account is less frequent because the account balances are cleared out at the end of each fiscal year.
