Account Reconciliation

What is Reconciliation?

Reconciliation is the process of comparing information entered on one form or document with information from other records and other sources. It’s used to reconcile information from various financial records to show a rooted, accurate financial position. The key concept here is that reconciliation isn’t about what you think your records show — it’s about what they show.

What is Account Reconciliation?

Account reconciliation in accounting is a process in which reconciliation checks are made to ensure that the financial data in any of the company’s statements (or any documents required under law) is correct, consistent, and up-to-date.

Account reconciliation occurs when obtaining correct information from both a current and previous accounting information system. The information obtained through reconciliation involves the balances for each account and any adjustments to those balances. This occurs regularly between all organizations with a common system for accounting information. Understanding the reconciliation process is critical in avoiding errors that can occur during financial reporting.

Account reconciliation is a process that combines three different intelligence sets:

  • one for the activity on the account (such as the number of transactions), 
  • another for credit information profiles (such as FICO scores), and 
  • third for information on each of your debit cards and credit cards. 

The center is pulled from your bank, your participating payment networks (Visa and Mastercard), and a third-party company like Experian. It’s then filtered to make sure it only includes the data needed for reconciliation.

Why Do We Need to Reconcile Accounts?

Account reconciliation is an important step in the annual accounting process that needs to be performed on an ongoing basis to ensure that all elements of an organization’s financial data, including employee compensation and expenses, revenue, expense, income, cash flow, and liquidity, are accurately reported. This step involves adjusting operating and financing data to correct discrepancies between financial statements presented by different reporting entities.

Sarbanes-Oxley is not the only financial oversight that your company will need to perform. You will also want to ensure financial reporting is adequate to support your company’s financial needs. Management understands the materiality of any potential risks that arise from those reports and the necessary corrective action to be taken should a result arise.

The most fundamental reason to reconcile your accounts regularly is to prevent financial loss — theft from theft or misuse of known or unknown funds. It’s important to know your personal finances to protect yourself and ensure that you have the cash available to meet your immediate needs. But the financial protection it provides goes far beyond preventing reduced income. By effectively managing your cash and credit, you can improve several financial metrics — including credit score, the number of accounts opened, and average debt per account.

What Causes Reconciliation Discrepancies?

There are many reasons why your accounts may not match the financial documents in the books; four main causes are explained below:

1. Timing differences

There are many reasons reconciliations don’t match correctly. If you rely on paper checks and send vendors pre-dated checks, they may post to your account before the date on the check. If vendors receive electronic payments from multiple accounts, they may use the earliest payment date that matches. Or, your accounts payable clerk or bookkeeper might enter a payment in the wrong account.

All of these scenarios can cause a reconciliation discrepancy. Now, events are instantly communicated through financial transactions, so the delay between the money transferred from one account to another is measured in minutes or hours.

2. Mistakes

Reconciling discrepancy is a normal part of the financial process. Everyone makes mistakes. You accidentally transposed two numbers. You double-counted some figures. Maybe you used the wrong Excel formula to calculate a journal entry, or maybe there’s an error in your spreadsheet. It could also be that there was a bank error that slipped by your accountant. Human error is inevitable. Everyone makes mistakes that cause reconciliation discrepancies. Reconcile your accounts regularly to catch and correct errors as they occur.

3. Missing Transactions

Reconciliation discrepancies occur when transactions go unnoticed. Even the most diligent accounting teams can’t catch every transaction. Specialized software help to create complete and correct financial statements by providing a basis for comparison with the bank statements.

4. Fraud

Business owners and finance professionals often worry about risks related to reconciliation discrepancies. Fortunately, most instances of fraud can be spotted by careful review of reconciliations.

How to Do Account Reconciliation?

Before we get into the nuts and bolts of this process, let’s briefly review who does reconciliations, what they’re designed to accomplish, and when you’re likely to do one.

Who – The best candidate for this position needs to have a thorough knowledge of the various transactions in a company. This usually means that person works in accounting or has been accounting long enough to know what kind of transactions commonly occur.

What – Businesses should reconcile balance sheet accounts regularly. AutoRec makes reconciliation an easy and fast process. Cash, bank loan, and credit card accounts should be reconciled regularly.

When – To identify and resolve any discrepancies between your company’s accounts, make sure to do reconciliation regularly. Most reconciliations should be carried out after closing.

The Four Basic Methods for Account Reconciliation

1. Reconcile To Account Activity

Prepaid expenses, revenue accruals, accrued liabilities, and accounts payable must be reconciled periodically. Comparing a worksheet calculation to the balance in the general ledger will resolve an account if the two match.

2. Reconcile To Subledger Activity

The general ledger reconciles the balances of accounts receivable, accounts payable, inventory, and fixed assets. These accounts are usually found in separate sub-ledgers or schedules. Still, any reconciliation of these schedules should list the balance of the sub-ledger or schedule against its general ledger match.

3. Reconcile With A Rollforward

When you’re reconciling an equity account, typically, you will want to perform a roll forward. A roll forward is when you start from the ending balance of the prior period and add all the increases and subtract all the decreases to get to an ending balance.

4. Reconcile To A Bank Statement, Credit Card Statement, Or Loan Statement

The starting point for all reconciliations is the ending point from the previous reconciliation. If the prior reconciliation no longer ties, you’ll need to go back in time and identify the changed transactions.

After reviewing the beginning balances, check the last period’s ending balances against the amounts to verify that all the payments were received during this time and all the purchases have been processed and entered.

Check transactions against the bank statement to verify and reconcile all accounts. Match information such as dates, amounts, and descriptions. Mark each one off as it is matched. The process can be time-consuming. Check for any discrepancies or omissions now so that they don’t raise their heads later.

Finally, match the transactions on the bank statement to those on the general ledger. Make sure the debits equal credits and that transaction that has not yet cleared the bank are recorded as such. If there is a difference between what the bank has reported and what you have reported, determine why and make corrections where necessary.

Account reconciliation involves two steps –

  1. Monitoring
  2. Adjustment

Monitoring tracks your outgoings correctly both against your forecast and against historical patterns. From there, adjustments can be made to account for future trends and improvements.

 The most common way of adjusting for changes is through improving statistics, but there are other options for adjusting for technological changes or statistical anomalies introduced during the reconciliation process.

There are 2 ways to reconcile your account. Those are:

  1. Document Review: Documentation reviews occur after an account reaches a certain number of approved transactions and informs whether enough steps have been taken to ensure customer data privacy.
  2. Analytics Review: Analytics refers to analyzing an account’s activity, transaction history, and trends.

Personal Reconciliation

When individuals reconcile their checkbook and credit card accounts, the individual compares their written checks, debit card receipts, and credit card receipts with the bank and credit card statements to determine whether money has been withdrawn fraudulently.

By reconciling bank accounts, people can make sure that their banks have no mistakes in their accounts, and it will give them an overview of their spending. When a bank account is reconciled, the statement’s transactions should be equal to the account holder’s records.

Business Reconciliation

Companies must reconcile their accounts to prevent balance sheet errors, check for fraud, and keep auditors happy. Each month, companies close their books and perform a reconciliation of all the accounts.

The main purpose of business reconciliation is to ensure that every transaction is properly accounted for. Business reconciliation is the process of analyzing balance sheet accounts in the general ledger to make sure each transaction is correctly recorded.

To ensure that the cash inflows and outflows concur between the income statement, balance sheet, and cash flow statement, reconciliations are required.

What Is an Example of Reconciliation?

An example of reconciliation occurs when a client sends a payment to the company and realizes later that have made an excess payment. To reconcile this, the company has to first create a ledger and reconcile all credit and debit entries. Once that is done, if there is balance showing of the customer, then the customer has sent excess payment. On the other hand, if there is credit showing then the customer has to pay the company. Thus Account reconciliation can help reconcile payments.

Conclusion

Account reconciliation is important for the financial health of your business. It allows you to identify which customers have over-reported or under-reported their income and ensures payments are made to the correct party. You should consider including reconciliation options within your payroll software to improve overall compliance and accuracy with tax and accounting requirements. If reconciliation isn’t carried out correctly, it can result in overly optimistic estimates and excessive delays in preparing your reports.