The financial close process is one of the most important and consistent processes that take place in business. Whether you’re managing a mid-sized or large business, your reconciliation finance process and the tools you use play a vital role in your business’ functioning. Since account reconciliation happens repetitively and relies on accurate data, it is perfectly fitting for automation software to manage so that you can make well-informed and timely decisions.
Let’s take a look at the high-level and nitty gritty details that come along with account reconciliation, as well as how automation can expedite and secure the process.
Reconciliation is an accounting process that compares records to ensure that the numbers are correct. Your business’ general ledger and bank statement should be in agreement.
When these records don’t agree and there’s no explanatory reason, then it serves as a signal that there has either been a mistake or a form of fraud has taken place. Acceptable differences include timing, as not all payments and deposits will make it into the bank account in time to be reflected by the statement. Yet, there could be unexplainable discrepancies which will require some investigation to resolve.
Both individuals and businesses may reconcile their accounts. For publicly traded businesses, account reconciliation is mandated and regulated as financial statements are public record. Account reconciliation helps to ensure the accuracy of financial statements.
It’s probably obvious to you by now that you need to reconcile accounts for a variety of cost-saving reasons. For starters, comparing your transactions and balances is a way to avoid overdrafts on cash accounts, notice overcharged credit cards or pinpoint suspicious or fraudulent activity.
Reconciling accounts is also used to ensure that all your financial statements are accurate and reliable. Not only will doing so help to reduce compliance risk, but it will also help you better understand the business’ financial health at any given time.
The account reconciliation process involves numerous sources of data. For this reason, when performed manually, it can be rife with errors. By integrating an automation solution, the system can pull together documents from banks and internal ledgers to cross-reference in seconds. This means your accounting team can direct their time to high-level tasks like analytics.
With an automated reconciliation process, you’ll be able to check in on your business’ financial status with high integrity and confidence at any given time. This important information is a basis of many big decisions that will affect your organisation’s bottom line, so it pays to know that the information is accurate and processed in a timely manner.
The reconciliation process may vary in small ways from business to business, but overall there are a few steps that must be taken to run the process. Businesses compare their general ledger, or “books,” to their bank statements to ensure that the records match.
The cash book allows a business to record all transactions that happen in the bank, as well as cash transactions. The bank statement shows how much cash is in the bank. The cash column in a business’ books will show how much cash is available, and the bank column will show how much is at the bank. Since businesses rely on cash flow to make important decisions, these numbers need to be right to avoid monetary issues or overspending into debt.
Usually, businesses receive bank statements at least monthly. The statement will document all transactions like deposits and withdrawals, as well as bank account fees. Upon receiving the bank statement, the reconciliation process should involve these steps:
Every transaction that takes place should appear in both the cash book and the bank statement. Deposits should match up with the debit side of a bank statement and credit side of the cash book. The credit side of the bank statement should align with the debit side of the cash account. As such, they balance one another out. As you compare the books, be sure to mark both sides as appearing when they do. Or, if you are using an automation solution, the system will compare records for you without having to do this manually. If anything shows up as not having a match, you will be notified with an alert from the system.
You’ll need to make the bank statement account match the corrected balance if it does not already. To do this, you’ll have to add deposits that have not yet been reflected in the statement, add/deduct bank errors and account for outstanding checks. While it’s uncommon for bank errors to occur, they could. They could show up as an incorrect amount or a missing amount that appears in the general ledger, but not at the bank. If this happens, be sure to contact your bank immediately to rectify the error. You’ll likely have to submit supporting documentation.
If you’ve been charged service fees, interest, or overdraft fees, you need to update your cash account to reflect these differences.
After you’ve adjusted both accounts to record missing information, then the records should be equal. If the final amount is not equal, you will know that a mistake still exists. This will take you back to running the account reconciliation process again.
While this process could entail a large amount of manual effort, it doesn’t have to. Account reconciliation software can do all the heavy lifting by pulling together data sources and comparing entries. Humans are still involved in the process, especially when a discrepancy shows up. But, you will save time and reduce manual errors by running the reconciliation process automatically.
Businesses reconcile accounts to correct for balance sheet errors, avoid auditing issues and to protect against fraud. If bank statements differ from the books, then accountants must correct the general ledger.
If your business operates on the direct method of presenting the cash flow statement, then you will have to reconcile the cash flows with the income statement and balance sheet. When using the indirect method, chas-low-from-operations is already a reconciliation of the financial statements.
As a business leader, you bear the responsibility of enacting a reconciliation process that follows best practices. One of the simplest measures to take to ensure reconciliation finance is handled in a standardised, consistent and accurate manner is to adopt an automation solution.
An automation solution will take care of all these best practices inherently. Whether you choose to implement automated account reconciliation or not, you should try to follow these best practices to account reconciliation:
It’s best to reconcile your accounts every time your bank statement is ready for review. In most instances, businesses do so monthly, but it could happen weekly or even at the close of each day. Reconciliation is generally performed daily by businesses that have a large amount of transactions.
If you use an automation tool, you can set up the system to pull together data at your desired scheduled intervals. If you plan to complete the reconciliation process manually, you’ll need to ensure that all information is up to date before you begin comparing records.
As regulations have tightened around businesses’ financial happenings, the importance of accurate account reconciliation has increased. For example, in America, the Sarbanes-Oxley Act was passed in 2002 and ushered in the need for balance sheet reconciliation to be conducted internally. As the onus falls on financial departments amidst their many other duties, it’s required that finance reconciliation takes place in a timely manner.
With automation solutions like SolveXia, your team can benefit from:
The best types of processes to apply robotic process automation include those that are iterative, data-heavy and time-sensitive. Account reconciliations are all three, and so, they can be made easy with automation solutions like SolveXia.
By automating your account reconciliation process, your accounting team can take back their time and use it to spend on high-level tasks to maximise their value.