Accounting Reconciliation: Experts Guide to Success

It’s a priority for every business to have their finances in good shape and accurate order. Accounting reconciliation is a process that is crucial to ensuring this is the case.

Given the various types of reconciliation and steps involved, we’re going to share what it entails and how you can streamline your reconciliation process using finance automation software.

Coming Up

What is Accounting Reconciliation?

Why is Accounting Reconciliation Important?

What are the Steps for Accounting Reconciliation?

What are the Methods to Reconcile Accounts?

What are the Types of Accounting Reconciliation?

What is an Example of Accounting Reconciliation?

What Causes Discrepancies in Reconciliations?

What are Accounting Reconciliation Best Practices?

What are the Benefits of Accounting Reconciliation Software?

Closing Thoughts

What is Accounting Reconciliation?

Accounting reconciliation is an accounting process that compares your company’s internal records of transactions with third-party documentation to make sure that it is in alignment. This includes comparing the general ledger account balance to independent systems and/or bank statements.

Accounting reconciliation takes place at the end of every accounting period and is necessary to make sure that your account balances are in order.

Why is Accounting Reconciliation Important?

Every business should perform account reconciliation. It’s an important step to close the books for the month, as well as to be able to prepare reliable financial statements.

As a primary internal control, account reconciliation helps to detect fraud and also make sure that the general ledger (GL) is correct.

By performing timely account reconciliations, you can make sure that your company’s financial position is known and understood at any point in time.

It helps to:

• Track overdrafts
• Maintain financial records accuracy
• Adhere to regulations and compliance legislation
• Reduce and/or prevent risks

What are the Steps for Accounting Reconciliation?

The reconciliation process includes the following steps:

1. Collect Data

Bring together your internal and external data sources, like the cash book and your bank statements, for example.

2. Perform Transaction Matching

Go through the records line-by-line to ensure that the information matches up.

3. Review for Errors

It’s unlikely, but possible that the bank statement displays a record incorrectly or is missing information. If it’s the case, be sure to remedy the record.

4. Ensure Equivalence

Once you’ve gone through the records, make sure that the ending balances are matching up.

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As you can see from each of these steps, there’s a lot of moving parts. If you conduct accounting reconciliation manually, it will take a lot of time and is highly error-prone. This is particularly true if you have a high volume of transactions from multiple payment providers like Amazon, ebay, Worldpay, Paypal and Stripe.

Instead, you can utilise software such as SolveXia to automate the process for you. This way, you save time, prevent mistakes, and can alleviate your team from being bogged down with manual, repetitive, and tedious tasks.  

What are the Methods to Reconcile Accounts?

There are two primary methods to reconcile accounts, namely:

1. Documentation Review

As the most common method used, documentation review requires reviewing account details in statements to make sure each record is accurate. To exemplify, this could be the review of saved receipts made for purchases that then get compared to bank statements.

2. Analytics Review

Analytics review is performed by historic analysis. It looks at what is expected to be the amount in an account based on previous activity levels versus what’s actually there. If it’s majorly off what’s expected, it’s a sign to check for fraud and/or mistakes.

What are the Types of Accounting Reconciliation?

While bank reconciliation and balance sheet reconciliation are some of the most popular types of reconciliation, there are many types of reconciliation that are valuable to your business’ workings.

Here’s a look at the various types (keep in mind: financial automation software can automate and streamline every type of reconciliation that you wish to perform):

1. Bank Reconciliation

Bank reconciliation compares a business’ cash position to the value recorded by bank transactions versus the monthly bank statements.

2. Vendor Reconciliation

Vendor reconciliation looks at the balance owed based on a statement provided by a supplier versus your payable ledger and its balance. You may need to request such statements from your suppliers because they aren’t provided automatically like bank statements are.

3. Intercompany Reconciliation

If your company is the parent to multiple subsidiaries, then intercompany reconciliations compare the booked value of what’s owed and owned by one company with the balance of its subsidiary.

4. Customer Reconciliation

For businesses that offer credit terms to customers, this type of accounting reconciliation checks that the invoice records and accounts receivable ledger are matching up.

5. Business-Specific Reconciliation

This compares internal records at the beginning and end of a financial cycle to make sure that goods and services sold are matching up in your internal records.

What is an Example of Accounting Reconciliation?

To better understand why accounting reconciliation is so paramount, consider this example:

When your business buys assets that are intended to generate revenue, that purchase must be recorded on the balance sheet and the income statement. On the balance sheet, the asset is classified as an asset, whereas it represents an expense on the income statement.

By matching the transaction on both documents, you’ll be able to better track your business’ financial standing and oversee its cash flow.

What Causes Discrepancies in Reconciliations?

It’s not uncommon to notice discrepancies during the reconciliation process. While it can be alarming at first, some of the mismatching data is actually easily explainable.

1. Timing Differences

Sometimes, activity that’s in the general ledger doesn’t show up on supporting data, which could be because of timing differences. For example, bank accounts may be delayed between the time you submit a deposit versus when it clears and shows up.

2. Missing Transactions

Your records may be missing transactions. It could be the case that your credit card processing statement shows expenses, but they were not added into the general ledger. If this is the case, you’ll have to adjust your journal entry.

3. Mistakes

Humans are prone to making mistakes, especially when working with data manually. It could be something as small as a transposed figure, which could seem small as a single line item issue but could spell a big difference in your balances.

4. Duplications

It may be the case that data is duplicated, which is likely to happen when dealing with a high volume of transactions, multiple payment providers, and manual data entry.

5. Fraud

In some instances, your account reconciliation isn’t aligned because of mischievous and threatening behaviour, such as fraud. By performing accounting reconciliation consistently, you can help to stop fraud in its tracks.

6. Miscoding

Another honest mistake could occur with incorrect classification and coding of records.

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By using automation software, you can reduce all of these risks immediately. Additionally, you get to help your team focus on adding more insights and value to the business, rather than having to spend time manually performing repetitive and tedious tasks.

What are Accounting Reconciliation Best Practices?

In order to optimise your account reconciliation processes, keep in mind this following list of best practices. They will help to expedite your month-end close process, prioritise accuracy, and make reconciliations seamless rather than stressful.

1. Standardise the Process

It’s valuable to define your account reconciliation process step-by-step so that everyone within your company who has a hand in the process is aware of what’s expected.

You can standardise the process by using pre-built automation templates for starters. If you implement a tool like SolveXia, there’s a library of process templates you can make use of to start automating right away. Or, you can customise the process using drag-and-drop functionality.

2. Prioritise Automation

If you’re not already using automation software to help with your finance processes, it should be a primary goal. With an accounting reconciliation automation tool like SolveXia, you can overcome the need for time-consuming and error-prone manual labour by replacing it with automation.

Automation software like SolveXia is able to connect your data systems, perform accurate transaction matching in a fraction of the time, and even produce analytics and reports to help you make more informed business decisions.

3. Correct Errors

If you notice a mistake during accounting reconciliation, it’s imperative that it gets reviewed and rectified. After all, this is the point of account reconciliation- to make sure that your account balances are in agreement.

4. Process Documentation

For any activity taken during an account reconciliation, be sure to document what happened. This way, if another responsible party is involved in the process, they are aware of what action was taken.

With the use of automation software, all actions are recorded and data is securely stored, so you don’t have to worry about this step.

What are the Benefits of Accounting Reconciliation Software?

Accounting reconciliation software works by connecting to all your data sources to get started. Once it can pull information from any system, including third-party and legacy systems, your organisation saves a tremendous amount of time from having to manually source data.

Then, it moves through the accounting reconciliation steps by conducting transaction matching and alerting your team if discrepancies exist. Without having to perform accounting reconciliation manually, your business stands to:

• Save time
• Reduce errors
• Prevent key person dependencies
• Maximise accuracy
• Adhere to regulations
• Meet critical deadlines
• Catch fraud early on
• Increase productivity
• Enhance internal control

The use of automation software also makes it possible to scale your business efficiently. No matter how many transactions you have or payment processors your company wishes to use, it won’t add any extra level of difficulty because the system can ingest all the data and reconcile transactions with ease.

Having access to centralised data makes it possible to review your financial position in real-time and make informed business decisions accordingly.

Closing Thoughts

Accounting reconciliation is a must-do for every business. Rather than being slowed down and risking missing deadlines through manual reconciliation, any business can reap plenty of advantages from using automation software like SolveXia.

Autmation cuts your reconciliation time down from days to minutes, improves accuracy by 98% and also adds to your employees’ satisfaction levels as they can remove redundant and repetitive tasks from their own to-do lists.

To see how a tool like SolveXia can work for you, we invite you to request a demo today!