Imagine a company that neglects to reconcile its financial accounts every month. Over time, bank errors, missing transactions, and data entry mistakes that go unaddressed result in misleading financial information. Cash flow problems begin to appear, and bounced payments lead to overdraft fees. In worst-case scenarios, fraud and unauthorized transactions result in substantial losses. It’s a scary picture.
No matter your business or industry, account reconciliation is necessary to:
- Ensure accurate financial reporting.
- Identify fraud.
- Strengthen internal controls.
- Improve decision-making.
It also makes your company audit-ready, reducing risks and streamlining the audit process.
What is Account Reconciliation?
In accounting, reconciliation is the process of matching and comparing internal financial records, such as general ledger accounts, with external sources, typically bank statements. No matter which documents are being compared, the goal is to ensure a business’s financial data is accurate, consistent, and reliable.
Discrepancies found during the reconciliation are investigated to figure out the cause and to rectify errors and omissions.
The process of reconciling accounts typically includes:
- Gathering relevant data.
- Matching transactions.
- Identifying inconsistencies.
- Documenting the reconciliation process.
Types of Accounts That Require Reconciliation
Multiple financial records accounts require reconciliation and include:
- Bank account reconciliation ensures your company’s recorded transactions match the bank’s recorded deposits, outstanding payments, and bank fees.
- Credit card accounts. The company’s internal records, including credit card statements and expense reports, should be compared with the statement issued by the lender.
- Accounts receivable. Amounts recorded in the general ledger are compared with individual customer account balances, ensuring monies due are accurately reflected.
- Accounts payable. Vendor or supplier account balances are compared to the amounts recorded in the general ledger, ensuring your company’s liabilities are accurately represented, and no invoices are unrecorded.
- Inventory account reconciliation compares the recorded quantities and inventory values with physical counts and the company’s valuation methods.
- Fixed assets. The recorded costs, depreciation, disposal, and addition of fixed assets like buildings, equipment, and vehicles are compared to the asset register or other asset management system.
Account Reconciliation Best Practices
These five best practices ensure your reconciliation process is relevant and effective.
- Establish internal controls. Clearly define your business’s reconciliation procedures, outlining the steps involved, individual responsibilities, and company or industry-specific guidelines.
- Reconcile accounts regularly. Timely reconciliations, preferably monthly or quarterly, help identify problems and allow for quick corrective actions.
- Use appropriate tools. Advanced technologies and software programs streamline the reconciliation process, automating repetitive tasks, providing matching algorithms, and offering built-in checks and balances.
- Perform variance analysis. Compare and analyze the differences between expected or budgeted amounts and actual figures. The goal is to understand why a variance occurred and whether it’s the result of errors, pricing inconsistencies, timing differences, or other factors.
- Document and retain records. All supporting records and documents, including explanations and resolutions of variances, should be kept for the appropriate amount of time as established by internal policies or local, state, and federal regulations.
Routine account reconciliation is critical for reliable financial reporting and the efficient management of your company’s financial operations. To learn more about the reconciliation process or to schedule an accounting or tax consultation, contact Gurian CPA Firm online or call 469-374-3151.
