What Is Account Reconciliation and Why Is It Crucial?

What are the examples of accounts reconciliation and what is their purpose?

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.

When to perform accounts reconciliation?

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.

What is the process of accounts reconciliation?

In accountancy, each transaction that occurs usually has at least two entries. For instance, when you sell products, then you have a sale entry and the buyer adds the product to its inventory or assets as applicable. The process of accounts reconciliation will require you to look at the paperwork from both sides. Here are some steps that you can follow to ensure regular and accurate accounts reconciliation:

1. Collect all the paperwork
2. Get bank details
3. Ensure that you have the contact information of relevant people
4. Start with one aspect before moving on to another
5. Make notes as you go on to record  discrepancies
6. Correct the entry to reflect the right detail
7. Keep the stakeholders informed about the changes you have made
8. Set a schedule for regular reconciliation to close any gaps

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

What are the best practices for accounts reconciliation?

Since accounts reconciliation is a crucial but rather tedious process, it is important to learn the best practices that will help the process.

1. Give priority to setting an accounts reconciliation process
2. Establish standard procedures in keeping with statutory requirements
3. Automate processes like accounts receivable to ensure better cash application
4. Study the process constantly to discover gaps in the process and resolve these gaps
5. Use a risk-based approach to ensure that crucial processes are reconciled regularly

How HighRadius can help you with account reconciliation?

At HighRadius, we have been helping our customers optimize their processes, leverage automation to maximize the impact of ERP, and manage cash flow. As part of our , we offer various software solutions to help manage the entire . Starting from credit onboarding to eInvoicing, collections, cash reconciliation, and deductions, our solutions help our customers manage their receivables.

Our artificial intelligence-based cash application ensures that cash posting happens automatically.