Account reconciliation is the process of cross-checking a company’s financial records with external documents, such as bank statements. Its purpose is to ensure accuracy and consistency of financial data, which is vital for informed decision-making and maintaining financial integrity.
It is a general practice for businesses to create their balance sheet at the end of the financial year as it denotes the state of finances for that period. However, you need to record financial transactions throughout the year in the general ledger to be able to put together the balance sheet.
While the entries in the general ledger are based on the facts of the moment, they may not always be accurate. when you receive a check from a customer, you may have recorded it as paid. But there are chances that the check could have bounced due to numerous reasons. Or the payment you made to supplier A went into the accounts of supplier B due to a clerical error.
An example of reconciliation in accounting is comparing the general ledger to sub-ledgers, such as accounts payable or accounts receivable. This ensures that all transactions are recorded accurately and any discrepancies are identified and corrected.
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.
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 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 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.
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.
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.
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.
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.
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.
Since accounts reconciliation is integral to ensuring proper management of the cash flow and other assets of the company, we need to look at when and how often should accounts reconciliation be carried out.
To ensure that the occurrence of the accounts reconciliation process takes place logically, it is critical to segregate based on the types of reconciliation:
Cash and bank balance: This reconciliation should be done every time you get a statement from the bank to ensure that you are accounting for differences at the earliest.
Accounts receivable and payable: In most instances, these follow a typical cycle from purchase or sales to payment or receipt of payment. You can either follow the same cycle (for instance 45-day credit cycle can follow a 45-day reconciliation cycle) or make the process more efficient, and carry out reconciliation once every two weeks. One of the best ways to mitigate the issue of receivable reconciliation is to automate the entire AR process.
Advance payments and accrued liabilities: To reconcile these payments and accrued liabilities, you can follow the same cadence as the payments themselves to ensure that all details are current.
Other categories: For inter-company transactions, assets bought and sold, and investments, it is best to carry out accounts reconciliation once every 3 months.
To ensure accuracy and balance, the process of account reconciliation involves comparing the balances of general ledger accounts for balance sheet accounts to supporting sets of records and bank statements. Additionally, rolling schedules are maintained with beginning balance, additions, reductions, and ending balance for specific accounts.
Here is a step-by-step process for performing account reconciliation:
Here are some of the most common types of account reconciliations:
While the discrepancies that need to be addressed through accounts reconciliation are vast, we list here some of the most common ones:
Here’s how such situations can be corrected:
Here’s how such situations can be corrected:
Here’s how such situations can be corrected:
Here’s how such situations can be corrected:
Here’s how such situations can be corrected:
Here are five best practices that can help your organization to improve the account reconciliation process.
HighRadius’ Account Reconciliation software combines artificial intelligence (AI) and machine learning (ML) to ensure account reconciliations are done quickly and accurately.
Accountants typically perform an account reconciliation for all their asset, liability, and equity accounts. This process involves reconciling credit card transactions, accounts payable, accounts receivable, payroll, fixed assets, and subscriptions to ensure that all are properly accounted for and balanced.
Accuracy and completeness are the two most important things when reconciling accounts. Additionally, reconciling accounts on time consistently is also essential.
Account reconciliation is an internal control that certifies the accuracy and integrity of an organization’s financial processes. It helps in detecting discrepancies and fraudulent transactions.
The accounting team in an organization is responsible for reconciling accounts at the end of each financial period to ensure that the GL balance is complete and accurate.
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