Many businesses have to deal with the tedious and highly technical task of reconciling accounts, as it is one of the key steps in the close process. It is a process aimed at streamlining the general ledger balances as they flow into the financial statements. Here’s a look at what account reconciliation is all about.
What does reconciliation mean in accounting?
It is an accounting process where you compare your company’s general ledger entries with an independent statement to ascertain that the figures agree.
What is the main purpose of an account reconciliation?
You would conduct accounting reconciliation to ensure your records are accurate, consistent, and complete. Account reconciliation also comes in handy in explaining the differences between the account balances and financial records.
What are the 5 types of accounting reconciliation?
The five main types of reconciliation are:
- Bank
- Credit card
- Vendor
- Customer
- Inventory
What are the 6 steps of reconciliation?
1. Data gathering
Determine the general ledger account that needs reconciling and the best source to compare with. Ensure the dates align.
2. Comparing
Perform a tick and tie, that is, match every transaction in the general ledger with the corresponding transaction in the second record.
3. Identifying errors
Note down all the items that do not match. You should also compare the account balances and note any discrepancies.
4. Investigating errors
Analyze and investigate any transaction without a match. That could be internal data analysis of the general ledger or the second source.
5. Adjustments
If the two accounts do not match, make adjustments. There could be transaction errors, omitted bank transaction fees, outstanding checks, or deposits in transit that reflect on one account but not the other.
6. Completion
Make the necessary adjustments by posting the required journal entries if the entries have supporting evidence. Confirm the new general ledger balance. If they do not balance, repeat the steps.
Keep the reconciling documents as evidence during auditing.
What are the benefits of accounting reconciliation?
The main advantages of reconciling accounts include:
- Accuracy of data: It allows you to validate the general ledger using an independent source and rectify errors such as miscalculations, duplication, omissions, and transposing errors.
- Detects fraud: One of the best ways to detect fraud. That explains why experts recommend conducting frequent and regular accounting reconciliation to catch unusual activity early.
- Improved cash flow management: Helps capture the actual state of financial affairs, helping you avoid bank overdrafts.
- Assists in budgeting and forecasting: You can determine the correct position and uncover incorrect information about an account, like inventory levels, which is crucial for data-driven decision-making and forecasting.
Manual vs Automated vs Outsourcing Account Reconciliation
There’s no universally accepted way to conduct account reconciliation, although the generally accepted accounting principles (GAAP) call for double-entry accounting. That means recording every entry twice in the general ledger (credit and debit account).
The traditional way of doing account reconciliation involved employing several accountants to carry out the reconciliation manually. As you’ve probably deduced by now, it was a tedious, time-consuming process rife with errors. That’s where automated account reconciliation came in handy.
With automation, AI can conduct the tick-and-tie process faster and more accurately than humans can. That leaves the accountant room to conduct the investigative part of the reconciliation from the derived report.
However, automation is costly as the software provider has to customize the tool to your workflow. That’s why you should consider outsourcing. When you outsource your account reconciliation to a firm such as Gurian PLLC, you’ll receive expert and professionally reconciled accounts.
Whether you’re a big, medium, or small business, Gurian CPA Firm will balance and close your accounts accurately and timely.
Final Word
Accounting reconciliation involves comparing all the entries in a general ledger and comparing it with a second source. It is a tiresome task best left to automation.
Since automation is beyond mid and small companies, they would be better off outsourcing the accounts reconciliation to firms like Gurian CPA. Contact us for professional, timely, and expertly done account reconciling.
