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The process of reconciliation is conducted as a part of the month-end closing activities before the issuance of the financial statements. Sometimes a major mistake gets overlooked in the financial statements if the reconciliation is not. Reconciliation of sub-ledgers and general ledgers helps in combing out potential errors.
Account receivable reconciliation is a process of ensuring that the account balances are aligned between two accounts—the company’s account and the customer’s account, at the end of the accounting period. The reconciliation of accounts receivable (AR) is the process of matching the detailed amounts of unpaid customer billings to the accounts receivable total recorded in the general ledger.
It is the process of matching and validating balances in the general ledger (GL) to external and internal sources or other independent calculations to ensure that month and year-end close is accurate. This process is important because it proves that the general ledger figure for receivables is justified. The two information sources for this reconciliation are as follows:
The accounting record contains double-entry bookkeeping which allows a business to keep track of credits and debits. In the general ledger, the account is specifically dedicated to the accounts receivable, the resulting ending balance in the ledger is the total summary to be verified through reconciliation.
The detailed listing of unpaid customer bills should match the ending balance in the general ledger which is usually recorded in a subsidiary sales ledger. Print the aged accounts receivable(AR), and compare this report to the accounts receivable total in the ledger.
The reconciliation of accounts receivable is the process of matching the authorized transactions with the recorded ledger. Reconciliation helps businesses to manage accounts receivable, with some additional benefits:
Reconciliation helps in keeping the statements accurate and provides extra verification for all the money transactions.
To generate a proper tax report without leaving any taxable transactions out of it.
Reconciliation prevents unauthorized transactions and stops people from stealing from the company.
To reconcile the accounts receivable account, the general ledger (GL) account associated with the customer’s subledger accounts needs to be reconciled first. Listing out which GL account or accounts are tied to the customer’s subledger accounts is considered a preparatory step.
Let’s first understand how the traditional AR method work. The task of creating and sending invoices, credit checks, collections, and tracking the whole process is usually done manually by an accountant or a business manager. All this is time-consuming and prone to human errors.
With the advances in technology, this process was shifted to digital mode and the adoption of computers with various accounting software made the process streamlined. Still, it was managed by humans with data entry and billings being done manually. But with recent advances in technology, the AR process has taken a step forward in achieving great efficiency with the least possible errors through automation.
Talking about how AR automation helps in reconciliation, we need to understand what was going wrong without the automation in place.
According to Forbes, 65% of emails are ignored and since most receivables details are shared over emails, missing an email or two can result in failing the whole process of reconciliation.
“I didn’t get the invoice” or “The invoice contains the wrong information” are some of the most common phrases used by customers when it comes to payments, which results in the delay of payment, and the information required for proper reconciliation is lost in such issues.
The above-mentioned roadblocks are faced by businesses while performing AR reconciliation, such problems are rarely seen among businesses that have a dedicated system that automates the whole AR process, which helps them in generating complex invoices, and collections, and devising the best payment plans.
There are four basic reconciliations—bank reconciliation, vendor reconciliation, customer reconciliation, and inter-company reconciliation.
The basic changes in the process greatly affect the overall accounts receivable process.
To ensure the accuracy and validity of the financial information available.
Learn how HighRadius automated solution reduces past-due A/R by 75% and improves the efficiency of the process by 40% across credit, invoicing, cash application, deductions, and collections processesRequest a demo