The Complete Guide to Account Reconciliation

Introduction

Have you interrupted your accountant matching records across several thick record books or computer screens? The chances are that you would have been greeted with a deadly stare that seems to say, “I’ll have to start the whole thing again now because of you.”

Account reconciliation is a fundamental step in the financial close and sets the base for closing the accounts. But given the large volumes of data matching records or reconciliation can be a strenuous activity. 

Before we dive deep into the nitty gritty of account reconciliations and their challenges, let us understand what exactly we mean by the term ‘account reconciliation.’

Chapter 1: Introduction To Account Reconciliation

What is account reconciliation?

Account reconciliation is comparing two sets of financial records to ensure they are accurate and consistent. This process is typically used to reconcile general ledger(GL), sub-ledgers (SL), bank statements, and other financial accounts with the corresponding records in an organization's accounting system.

Types of Account reconciliation

Here are some of the most common types of account reconciliation:

1. Bank account reconciliation: This involves comparing a company’s bank statements with its accounting records to ensure that all transactions are accurately recorded.
2. Accounts receivable reconciliation: This involves reconciling the amounts that customers owe a company for goods or services with the accounting records. This ensures that all payments are received and correctly recorded in the accounting system.
3. Accounts payable reconciliation: This involves reconciling the amounts that a company owes to vendors or suppliers with the accounting records. This ensures that all payments are made and correctly recorded in the accounting system.
4. Inventory reconciliation: This involves reconciling the physical inventory count with the accounting records to ensure that all inventory is accounted for and correctly valued.
5. Payroll reconciliation: This involves reconciling payroll records with bank statements and tax filings to ensure that all payroll transactions are accurately recorded and all taxes are correctly withheld and paid.
6. Credit card reconciliation: This involves comparing a company’s credit card statements with its accounting records to ensure that all transactions are accurately recorded and any discrepancies are identified and resolved.
7. Fixed asset reconciliation: This involves reconciling the physical assets owned by a company with the accounting records to ensure that all assets are accounted for and correctly valued.
8. Expense reconciliation: This involves reconciling expense reports and receipts with accounting records to ensure that all expenses are accurately recorded and any discrepancies are identified and resolved.

Account reconciliation process

Let's understand this with an example in the accounts receivables scope.

ABC Inc. is a manufacturing company that sells products to customers on credit. At the end of each month, ABC's accounting team needs to reconcile its accounts receivable balance with its customers' outstanding balances to ensure the accuracy of its financial records. To do this, the accounting team performs the following steps:

1. Gather data sources: The accounting team gathers data sources, such as bank statements, invoices, and customer payment records.
2. Match transactions: The accounting team compares the bank statements with the invoices and payment records to match transactions and reconcile the accounts receivable balance.
3. Identify discrepancies: The accounting team identifies any discrepancies, such as missing or incorrect transactions, and investigates the causes of the discrepancies.
4. Resolve exceptions: The accounting team resolves any exceptions, such as customer disputes or payment delays.
5. Update financial records: The accounting team updates the financial records, adjusting the accounts receivable balance to reflect the reconciled amount in the GL.
6. Reconcile accounts: The accounting team completes the account reconciliation process, ensuring that the accounts receivable balance matches the customers' outstanding balances.

By performing this monthly account reconciliation, ABC Inc. can ensure the accuracy of its financial records, reduce the risk of errors and discrepancies, and improve its cash flow management.

Other Examples of Account Reconciliations

In this section, we look at some examples of accounts reconciliation to understand the scope of work involved in accounts reconciliation and the tools that can help ease the process.

The cash balance in the ledger and bank account: Often the cash balance in the book of accounts and the bank accounts may not match. This could be due to many causes like missed entries, bounced payments, charges incurred, interest accrued, and much more.

Accounts payable: Accounts payable is the money a company owes to suppliers and vendors. The production and delivery of goods or services that the company deals with depend on smooth accounts payables. It is essential to reconcile the balance of accounts payables due to short payments, disputes, early payment discounts, and much more. This ensures smooth operations, supplier relations, market reputation, and much more.

Accounts receivable: Accounts receivable is the amount that your customers owe you for the goods sold or services provided. You will need to give special importance to reconciling accounts receivables to ensure steady cash flow and good customer relations to name just a few reasons. You will need to check the bank and ledger balances to ensure that there are no short payments, deductions, disputes, and to stop credit facility for defaulting customers.

Expenses paid in advance: Companies often pay some expenses or for some purchases in advance, especially when they are regular. However, accounts need to be reconciled to ensure that goods or services were received or delivered as per the contract. Reconciliation at this time also helps evaluate if the expense needs to be continued or not.

Accrued liabilities: In many companies, often a holiday period is given to customers during which the amounts due can be accrued as a liability. However, these sort of arrangements needs to be revisited, evaluated, and acted upon if required.

Inter-company transactions: In many organizations, there are subsidiaries, group companies, and so on. In such a situation, there can be inter-company deposits made, depending on the requirements of different companies. However, since each of the group companies has its legal entity and the books of accounts also need to be maintained separately. To ensure that all cash balance, liabilities, and assets are updated, periodic accounts reconciliation is required.

Assets sold and bought: Most companies have numerous assets including immovable property, machinery, inventory, cash assets, and more. Over time, these assets can be sold or written off according to their stage in the lifecycle or due to depreciation. Accounts reconciliation helps take stock of the assets that a company has and enables the balance sheet to reflect the true value.

Investments: Companies tend to invest in some projects or for taxation purposes or due to many other reasons. Periodic accounts reconciliation will ensure that the true value of the investments is reflected in the book of accounts.

What are common account reconciliation discrepancies and how to solve them?

While the discrepancies that need to be addressed through accounts reconciliation are vast, we list here some of the most common ones:

Ledger and bank balances not matching

Here’s how such situations can be corrected:

• Check for time differences or bank holidays causing delays in the amount showing up in the account
• Look for check-based errors like the number in figures and words not matching, wrong date, or signature errors
• Find out if the customer has raised a dispute but the finance department is not aware of it because the sales department has not updated them
• Consider automation of the receivables process to ensure that all the parties concerned have access to updated information

Physical inventory does not match with inventory records

Here’s how such situations can be corrected:

• Make sure that the store management team does an entry every time they dispatch goods to customers
• Carry out periodical inventory checks physically to ensure that all the damaged and defective goods are accounted for and records updated about any exchanges or replacements
• Invest in a centralized system that ensures that inventory records are updated in real-time

Actual customer credit balance lesser than accounted for

Here’s how such situations can be corrected:

• Check with the sales team if they have received further orders from the same customer and this has not been updated in the system
• Ensure that a credit onboarding of customers (even existing ones) is a part of the process before agreeing on sales with delayed payments
• Have an automated credit application in place to ensure that the credit terms are agreed upon based on the latest credit and other information

Amount paid by the customer but not completely reflected in the bank

Here’s how such situations can be corrected:

• Check if the customer issued a stop payment because they were not happy with the quality or other aspects of the goods or services they received
• Delve deeper to find out if there were some charges that were imposed by the bank which you failed to account for in your entries

The wrong amount was recorded in the ledgers

Here’s how such situations can be corrected:

• Look for early payment rebates that were agreed upon by both parties, which you did not consider while recording the amount
• Check for fees or penalties that you did not think about while making the entry

Why is account reconciliation important?

Account reconciliation is necessary to ensure an organization's overall financial integrity. Every accounting team strives to consistently complete its reconciliation process efficiently and without errors, which, when handled poorly, can snowball into larger issues later in the close. 

Thus it becomes important that organizations establish a strong system of controls within the accounting department to successfully maintain the company's financial records' accuracy, integrity, and compliance with no errors. 

Top 5 Benefits Of Account Reconciliation Process:

• Improved Accuracy & Cash Flow: Account reconciliation helps organizations timely identify and resolve discrepancies, such as unrecorded payments, overpayments, etc, in financial records. This timely identification and resolution of risks help organizations improve their cash flow, get paid for outstanding payments, and have accurate and up-to-date financial records.
• Fraud Prevention: Matching the company’s accounting records to external sources, such as bank statements, leads to detecting possible fraud, such as unauthorized transactions or embezzlement.
• Compliance: Many regulatory bodies like SOX, Basel III, and MiFID II require organizations to perform regular account reconciliations to ensure compliance with financial reporting standards. Failure to comply with these standards can result in penalties and legal action. Regular account reconciliation helps ensure the organization complies with all the regulations.
• Better Decision Making: Accurate and up-to-date financial records help both internal & external stakeholders make better and informed decisions and give an overview of the company’s financial health, allowing better and more confident decision-making.

Chapter 2: Challenges With Manual Account Reconciliation Process

In order to achieve the above benefits and reach the ultimate goal of error-free account reconciliation, we must understand where we stand today!

Spreadsheets have been the backbone of finance and accounting teams for decades. Despite technology changing and evolving over the years, finance professionals continue to rely heavily on outdated tools to manage the intricate and detailed reconciliation process required for the modern-day organization. 

And because of this reliance on spreadsheets, organizations find themselves buried in a mountain of work while spending an inordinate amount of time and resources to maintain the highly manual process.

Within this section, you’ll find the most common, often interconnected problems associated with manually reconciling accounts and the over-reliance on spreadsheets, and also learn how it affects your account reconciliation process.

Challenges with traditional account reconciliation process

1. Inefficient processes due to time-consuming nature:

   Manual account reconciliation can be time-consuming, especially for businesses with large volumes of transactions.

   To add to the problem, some accounts require weekly or daily reconciliation, but due to staffing and other responsibilities, these reconciliations are often left until the end of the month. Regardless of how frequently the accounts need to be reconciled, manually gathering all the necessary data sources takes too much time. As organizations expand, the time and effort required for successful reconciliation also grow.

2. Inaccurate reporting due to manual intervention: Manual account reconciliation involves comparing large amounts of data across multiple systems and allows significant room for human error, especially when teams are rushed and overworked during the month-end close. 
3. Lack of standardization: Manual methods lack standardization of reconciliation processes as every department and geographically spread subsidiaries perform account reconciliation differently, leading to inconsistencies & errors. 
4. Increase In potential risk & compliance issues: Traditional account reconciliation processes solely look at matching the fields and often ignore the patterns and trends visible in the data. You miss out on identifying potential fraud, thus increasing the organization’s risk profile.
5. Lack Of Visibility & Difficulty In Tracking Changes: With huge volumes of data, it becomes difficult to keep track of all the changes made in the reconciliation process, especially with multiple stakeholders. This lacks visibility and accountability, making it error-prone. Issues such as disconnected spreadsheets or asynchronous email chains lead to increased workflow bottlenecks that impact the timeliness of the reconciliation process.

Let us understand this with an example.

Step 1: The process starts at month’s end when the transactions from the bank’s General Ledger account are pulled from the ERP system, and the banking transactions are received from the bank.

Step 2: The senior accountant will pick the two files and import them into Excel on separate tabs. The accountant will then create a tab used as a work area for figuring out which transactions match.

Step 3: The Excel file and the matching process are very time-consuming, we have seen it done in all different ways in Excel to try to automate it. Some ways are through color-coding rows, using macros, using sortings, and vlookups. It is a tedious and time-consuming process.

Step 4: Once everything on the sheets is matched and the journal entry is created, it is then sent over to the Account Manager for review. If a problem is indicated upon review the Account Manager will send it back to the Staff Accountant. If no problems are indicated, the Account Manager will send it to the Controller for final approval. 

Step 5: Once the Controller approves it, they send it back to the Staff Accountant to extract the journal entry as a CSV file

Step 6: Update General Ledger.

The challenge here is the matching process is very tedious and time-consuming, and this process typically needs to be done early in the close cycle, which causes them to hold up a lot of other tasks.

As a result, despite all the hardwork the team puts in these challenges can burden employees and cause them to become overworked and stressed.

When an organization reaches this point, the risk of mistakes due to tight deadlines is very high. Sometimes, teams have to pass on numbers they need more confidence about to keep up with the closing process.

Chapter 3: Streamline Your Account Reconciliation Process with Autonomous Accounting

Introduction to Autonomous Accounting

While automation can speed up the process, there will still be times when a finance department needs to step in and review a report or an anomaly if the system can’t recognize data.

Accounting processes require more than just automation. They need to be autonomous, with artificial intelligence (AI) positioned as an integral part of the tech stack.

Autonomous accounting does not mean there is no human presence; it simply means that the human does not need to be the glue that holds the process together.

Autonomous accounting can simplify and speed up your reconciliations while ensuring accuracy and freeing up time in the department. AI-powered automated Accounts Reconciliation software can manage repetitive tasks like transaction matching, allowing finance and accounting teams to drill down into open entries or exceptions that require additional attention and develop strategic, qualitative activities.

Autonomous Accounts Reconciliation Process

Let’s dive deep into how AI-powered accounts reconciliation software will change the financial game.

• Data Integration:An automated accounts reconciliation software solution uses a data aggregation engine to integrate data from different sources, such as bank statements, invoices, accounting software, and payment records, into a single platform, eliminating room for errors. The automated data integration is quick and thus significantly reduces the time to reconcile.

• AI-powered matching criteria:The automated account reconciliation software solution is configured with defined rules of matching criteria, such as transaction type, amount, and date. Based on the matching criteria, the software automatically matches transactions across different systems into various data sets, such as bank statements and invoices.

  For example, if Amount and Date match for a transaction across the 2 data sets, it becomes a 1 to 1 match. If the sum of two or more transaction amounts in our ledger ties out to 1 transaction on the bank statement, it becomes a 1-to-many match. Payroll is a good example of this type of one-to-many transaction.

• End-to-end accounts reconciliation management: You can then prioritize the reconciliations based on the risk matrix using automated workflows to complete accounting tasks. Dashboards help track key reconciling metrics in real-time.

  Automated account reconciliation software can help ensure compliance with regulatory requirements by enforcing standard rules and procedures for data analysis, matching, and exception handling. This can help organizations avoid penalties and legal action and reduce risk.

  It also helps establish consistent workflows that standardize the reconciliation process across multiple users, departments, and locations. This can help ensure that all staff members follow the same process, reducing the risk of errors or inconsistencies.

• Exception handling with anomaly detection: The automated account reconciliation software solution has exception-handling capabilities, allowing users to handle exceptions manually or to set up rules for the automated handling of exceptions. This helps to identify and resolve anomalies in a timely and efficient manner.

  For example, it can identify abnormal payment patterns, such as a customer consistently paying outside their normal payment terms or making payments in irregular amounts. This can help organizations identify potential disputes or cash flow issues before they become major problems.

• Reporting and analytics: The automated reconciliation software solution provides real-time reporting and analytics capabilities, allowing users to monitor the reconciliation progress and identify issues that require attention. The software provides insights into transaction patterns and trends, helping to identify potential issues and take proactive measures to address them.

• Continuous improvement: The automated reconciliation process is continuously evaluated and improved to ensure its effectiveness and efficiency. The software solution is updated with new matching criteria, rules for handling exceptions, and reporting and analytics capabilities to improve the reconciliation process over time.

  The system also supports continuous data integration to eliminate CSV’ing data to spreadsheets and support continuous reconciliations. 

  

  Thus, by adopting automated accounts reconciliation software, not only can any organization improve the accuracy, efficiency, and effectiveness of the accounts reconciliation process.

Chapter 4: How To Choose The Right Automated Account Reconciliation Software?

Choosing the right automated account reconciliation software can be a daunting task. We understand that. 

Below you will find a 4 step guide to choosing the right vendor for your account reconciliation automation that offers maximum return on investment (ROI), efficiency, and savings.

1. Identify current challenges and inefficiencies

Check with your accountants, accounting managers, and controllers about the challenges they face in closing the books. Ask specifically about the types of errors or omissions they see when reconciling books.

Also, check previous years’ audit reports to identify repetitive mistakes and actions recommended by the auditors. Study the best reconciliation practices followed in the industry. If needed, work with third-party finance consultants to identify gaps and put together a transformation plan for your finance department. 

2. Assess organization readiness

Nearly a third of the businesses are gearing up to digitally transform their accounting operations using a slew of technologies, including cloud, AI, analytics, and RPA. But the digitization of the accounting processes, including account reconciliation and financial close, requires strong back-end data management policies and infrastructure.

The following questions can help you assess whether your organization is ready to implement AI for its account reconciliation and other processes.

1. Are all my invoices digitized or in electronic format?
2. Do I have a central repository that collates all finance & accounting data collected via multiple systems?
3. Am I sure none of my teams use paper-based books to store data?
4. Is your accounting system cloud-based?

If you answered ‘Yes’ to all the questions above, your organization is pretty much ready to embrace AI. For further confirmations and checks on how you can implement AI, don’t hesitate to sign up for a free consultation with our AI experts.

3. Set goals and expectations

Automating your accounts reconciliation process doesn’t mean that you can dismiss your accounting team overnight or improve efficiencies twofold immediately. Setting realistic expectations from AI implementation is key to understanding your ROI on AI spending.

Some goals you can achieve with AI-based accounts reconciliation solutions such as Autonomous Accounting include:

• 40% reduction in month-end close time
• 100% elimination of Excel/spreadsheets
• Zero-day financial close
• Auto-certify 90% of accounts every month
• 95%+ straight-through reconciliation of invoices and bank statements

4. Identify the right solution/vendor

AI investments are critical decisions and not easily reversible. So, thoroughly checking the capabilities of the AI solutions you shortlist is crucial. Some of the factors that you need to consider when finalizing your AI partner are the features/capabilities of the solution, the cost, the strength of the datasets used to train the AI algorithm, the support offered by the vendors, including update timelines, security features, up-time, dispute resolution timelines, etc.

5. Account reconciliation automation vendor scorecard

Here’s a quick scorecard template you can use to score potential account reconciliation automation vendors objectively.

Chapter 5: How does HighRadius Transform Account Reconciliation Process?

Account reconciliation is done at multiple instances during the accounting process. What sets organizations apart is the type of vendor they work with.

It is essential for the success of any business or organization. It can help you to improve efficiency, reduce costs, and stay ahead of the competition.

How Is HighRadius Bringing In Change to the Accounting World 

Autonomous accounting is HighRadius’ AI-based record-to-report solution that enables faster financial close and accurate, automated account reconciliation.

It offers configurable matching rules and algorithms to identify and resolve variances in general ledger accounts and makes the financial data SOX-compliant and audit-ready.

1. AI and ML-driven automation: HighRadius leverages Artificial Intelligence (AI) and Machine Learning (ML) to automate the accounts reconciliation process. The platform uses AI and ML algorithms to analyze large volumes of financial data and identify anomalies, improving the accuracy and effectiveness of the reconciliation process.
2. End-to-end automation: HighRadius offers end-to-end automation of the accounts reconciliation process, from data extraction and transformation to matching and exception handling. This helps to reduce manual effort and improve efficiency. It also offers a financial close and anomaly detection solutions.
3. Integrated receivables platform: HighRadius offers an integrated receivables platform that includes end-to-end order-to-cash solutions, such as credit management, cash application, deductions management, e-invoicing and payments software, and collections management software, providing a comprehensive solution for organizations’ financial management needs.
4. Customer-centric approach: HighRadius strongly emphasizes customer service, offering dedicated customer success managers and a support team that is available 24/7 to assist customers with any issues or questions.

Chapter 6: Building a Business Case for Account Reconciliation Automation

Building a strong business case with potential ROI figures and tangible and intangible benefits is critical to get the necessary approvals for the investment. Below are some reasons why building a strong business case is important.

1. Justification: A business case provides justification for the investment of resources, time, and money into a particular project or initiative. It helps to ensure that the project aligns with the organization’s goals and objectives and provides a positive return on investment.
2. Clarity: A business case provides clarity on the project’s scope, objectives, and expected outcomes. It outlines the risks and benefits associated with the project and provides a clear plan for how the project will be executed.
3. Communication: A business case provides a clear and concise way to communicate the project’s value and importance to stakeholders, including senior management, investors, and employees. It helps to ensure that everyone is on the same page and understands the project’s purpose and goals.
4. Accountability: A business case helps to establish accountability for the project’s success or failure. It sets clear expectations for project performance and provides a framework for measuring and evaluating the project’s outcomes.
5. Decision-making: A business case provides decision-makers with the information they need to make informed decisions about the project. It helps to ensure that decisions are based on data and analysis rather than guesswork or intuition.

In summary, building a business case is necessary to ensure that organizations invest their financial and non-financial resources in the right projects that align with their goals and objectives and deliver the expected value.

Below is a 9-step guide to building a business case for account reconciliation.

1. Executive Summary: This section should provide a brief overview of the business case for implementing automated account reconciliation software, including the objectives, benefits, and costs.
2. Problem Statement: This section should describe the current challenges and issues with the organization’s account reconciliation process, such as manual processes, errors, discrepancies, or compliance issues.
3. Objectives: This section should outline the objectives of implementing automated account reconciliation software, such as improving efficiency, accuracy, compliance, or cost savings.
4. Benefits: This section should describe the benefits of implementing automated account reconciliation software, such as reduced manual effort, increased accuracy, improved compliance, faster financial close, or cost savings.
5. Costs: This section should outline the costs of implementing automated account reconciliation software, including software licensing, implementation costs, training, and ongoing maintenance costs.
6. Return on Investment (ROI): This section should describe the expected ROI of implementing automated account reconciliation software, including the estimated cost savings, productivity gains, or other financial benefits.
7. Implementation Plan: This section should outline the implementation plan for automated account reconciliation software, including timelines, resources, and milestones.
8. Risks and Mitigation Strategies: This section should identify potential risks and challenges associated with implementing automated account reconciliation software and describe the mitigation strategies to address these risks.
9. Conclusion: This section should summarize the key points of the business case and make a recommendation for or against implementing automated account reconciliation software.

Overall, a business case for implementing automated account reconciliation software should provide a clear and compelling argument for why the organization should invest in this technology, outlining the benefits, costs, and risks associated with implementation. By presenting a well-researched and comprehensive business case, decision-makers can make informed decisions about whether to proceed with implementation.

Chapter 7: Some Additional Resources

Download the HighRadius Account Reconciliation Datasheet, where we cover the end-to-end automation to achieve an accurate, audit-friendly account reconciliation process of the AI native platform.