July 15, 2020

Account Reconciliations - Everything You Need To Know

Finance Leadership
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Understanding your business’ financial health relies on account reconciliation. This process is a cornerstone of any business, regardless of size. However, some companies face more challenges than others in completing account reconciliation. It requires meticulous attention and can be best achieved with the help of accounting software. 

Here’s everything you need to know about account reconciliations and how to get them done in a timely and accurate manner. 

What Does Account Reconciliations Mean? 

Account reconciliation is the process of comparing internal and external financial documents to ensure that they match. To do so, your business will look at internal financial documents and check them against statements from banks, financial institutions and credit card companies. This is a necessary step to complete the financial close. 

For businesses without accounting software, the process is highly manual and often done on paper or with complex and timely online processes. For companies that utilise software made for this exact reason, you’ll be able to quickly and efficiently print batches of paid checks and review recorded transactions through the software’s register. 

When comparing internal and external documents, the goal is to investigate discrepancies and resolve them as soon as possible. Account reconciliation is not a choice for public companies. Public companies are mandated by laws around the world to include these internal controls with annual financial reports, such as in the USA, under Section 404 of the Sarbanes-Oxley Act.  


Benefits & Best Practices of Account Reconciliation 

Account reconciliation is an essential practice. While it’s not a choice for public companies, it’s still the best practice of any business. Account reconciliation is all about the accuracy of a business’ financial health, and it can help to prevent problems before they arise. 

Here’s a look at the main benefits of account reconciliation:

  • Account reconciliation helps to catch fraudulent or overcharge credit card transactions 
  • It helps to prevent overdrafts on cash accounts 
  • The process can highlight any negative financial activity like theft or errors in reporting 
  • Importantly, it reduces compliance risk by ensuring accuracy in the event of an audit 

One of the most significant benefits of account reconciliation is the role it plays in protecting the accuracy of your company’s balance sheet. A balance sheet relies on all inflows and outflows, including credit card transactions, cash and loans. As such, it’s essential to make sure the numbers match up with statements to have an accurate view of financial status. 

Here’s a look at some best practices for ensuring that your account reconciliation is executed correctly and managed:

  • Internal Controls: To uphold the accuracy of activity, you should make sure that all transactions are allowable and were authorised successfully. For example, if you are checking a travel reimbursement, you’ll need to make sure that all the information on the source document is correct. 
  • Error Correction: Account reconciliations are prone to errors, especially when data is being inputted manually. Have a plan in place to document any error correction. One of the benefits of using a data automation tool is that it reduces the chance of human error. Furthermore, if a correction must be made, there’s an audit trail and version history that can be reviewed. 
  • Documentation: Reconciliation processes should be meticulous and consistent. To make this happen, the process should be clearly defined and infinitely repeatable. This can be a reality by outlining the steps in the process, assigning responsibility to a person for each step, setting a timeline, incorporating a tool to prove that statements have been reconciled and have an established method to enact error correction

How to Reconcile Accounts: Analytics Reviews vs. Document Review

There are two main methods to reconcile accounts, namely analytics review and document review. Here’s what this means:

  • Document Review: This is the most common form of account reconciliation, which relies on reviewing each transaction’s line item on statements and comparing them to company records. 
  • Analytics Review: Analytics review is based on using historical estimates of account activity and comparing it to the actual reality. If the numbers are way off, then it can highlight potential errors or fraud. 

The Reconciliation Process

If you’re not automation your reconciliation process, then these are the steps you will want to take: 

1. Compare: Look at your internal account register against your bank statements and check them offline by line. 

2. Make Note: For any cash transactions that don’t appear on the bank statement, be sure to deduct them from the bank statement balance. That all outgoing funds have been reflected in both your internal records and your bank account.

3. Match: Make sure that you match direct deposits from the cash book into the bank statement and vice versa. 

4. Review: Although bank errors are infrequent, they could happen. If you notice a bank error, contact your bank ASAP and make sure that it gets resolved. The correction will show up in a future bank statement, so you’ll need to adjust the current period’s reconciliation to take care of the discrepancy. 

5. Equalise: At the end of the process, you want everything to match up properly. If you had to adjust, be sure to document what it was and why the difference occurred in the first place. 

Manual Vs. Automated Reconciliation 

Although automated software exists, some business owners still perform account reconciliation manually. This is mostly done with the usage of Excel spreadsheets; however, because of the sheer amount of data and numbers, it is prone to human error and can be very timely and costly. 

Automated reconciliation relies on software systems to collect and process data with limited human intervention and is very efficient, accurate, removes bottlenecks so finance can focus instead on high-value tasks providing analytics and insights to the business.

Benefits of Account Reconciliation Software

The benefits of automating the account reconciliation process are immediate and obvious. They include:

  • Reduced human error: It’s easy for a person to misenter numerical data, especially when they are working across various spreadsheets. 
  • Decreased operational costs: Automation solutions, maximise efficiency and get work done much more quickly than humans can. In turn, the reduced processing time leads to lessened operational costs.  
  • Increased productivity: Humans can focus on high-level tasks and increase their productivity as the software takes care of repetitive and tedious tasks. 
  • Improved accessibility: Processes like reconciliation may require approval and checks by various people within an organisation. When all data is centrally stored, it’s easy to access information when need be. 
  • Better data security: Software systems are built with robust data security. SolveXia, for example, has bank-grade security that is trusted by some of the largest financial institutions in the world. 
  • Minimised audit risks: The software system keeps track of all history and user access and can even create audit reports.   

How does Account Reconciliation Software work?

The uses for automation in business are expansive. Automation shines in the account reconciliation process because it fits the criteria so well for the types of processes to automate. To exemplify, the best processes for automation are: repetitive, require the utmost attention to detail and occur frequently. 

Account reconciliation software automates the above process by collecting data from various sources, including ERP systems, credit card processors, merchant services and bank statements. Then, it compares the data side-by-side and notifies users of any discrepancies so that humans can take it upon themselves to investigate a reason for the mismatched records. Some features of the software include automated approval workflows, document storage for review and audit, and reconciliation templates for easy standardisation. 

How to Effectively Implement Account Reconciliation

The best way to implement an account reconciliation process (and software solution) that fits your business’ need is by assessing the big picture. The solution you choose will need to work for countless transaction types throughout your business’ financial doings. As such, take the necessary time to set up your account reconciliation process within your team and assess software solutions that are scalable and easy to use. 

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