September 23, 2020

Finance Reconciliation: How to & Step by Step Process

Finance Leadership
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Having an accurate view of your business’ finances is an integral part of making the right business decisions. Finance reconciliation is just one process that requires timely completion. Whether your business has few or many transactions in any given month, you can rely on automation tools to help accurately reconcile accounts quickly. 

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Let’s dive into everything you need to know about finance reconciliation and how to manage it properly. 

Coming Up

1. What is Reconciliation?

2. Why You Should Reconcile Your Accounts

3. Understanding Account Reconciliation

4. Reconciliation in Business Accounting

5. Finance Reconciliation Process: Step-by-Step

6. Reconciliation Methods

7. Best Practices

8. How Automation Helps Finance Reconciliation

9. Wrap Up

What is Reconciliation?

Reconciliation is an accounting process that looks at internal records against external financial records, like bank statements, to find and resolve discrepancies. In its simplest terms, reconciliation ensures that money leaving an account is being properly spent and that the bank records accurately reflect the transactions. 

If your business finds that two records are mismatched between financial records or account balances, then account reconciliation is useful in figuring out why. Sometimes, differences are easily explained by timing differences or processing delays. However, when significant discrepancies happen that are unexplainable, then it could be a simple way to highlight fraudulent charges or a business that is “cooking the books.”

Businesses reconcile accounts either daily, weekly, monthly or annually or a combination of all of these. 

Why You Should Reconcile Your Accounts 

For starters, account reconciliation helps to make sure that your financial statements are correct. Balance sheets represent all the money you spend and all the assets you buy, so this is highly contingent on the accuracy of account reconciliation of accounts. 

Furthermore, account reconciliation can save your business money by potentially reducing overdraft fees and preventing improper spending. While some differences will naturally occur because of timing, finance reconciliation can highlight errors and spot overcharges promptly so you can take action to fix such charges. Finance reconciliation automation tools can run reports and compare transactions in the matters of minutes to point out anomalies in the transaction patterns. 

If you run a public company, then account reconciliation is mandated. If it’s inaccurate, you can face penalties when you get audited. So, to reduce compliance risk and protect your finances, account reconciliation is something that should be carefully managed and taken seriously. 


Understanding Account Reconciliation

Generally Accepted Accounting Principles (GAAP) set the required standard use of double-entry accounting. This means that every transaction is input into the general ledger in two places. This way, it’s easy to spot errors on either side of an entry. Companies will post a transaction in both the income statement and balance sheet. One will be recorded as a debit, and the other will be recorded as a credit. 

With double-entry accounting, it is also possible that just the balance sheet is affected. One example of this could be if your business takes out a loan. The loan is debited on the cash account (which is an asset on the balance sheet) and then credited in the long-term debt account (as a liability on the balance sheet). The goal is so that credits and debits balance each other out on the balance sheet. If they don’t, then there’s a problem because the sheet isn’t balanced! 

Reconciliation in Business Accounting

As a leader in business, you undoubtedly understand the importance and necessity of reconciling your accounts. You also probably do so on at least a monthly basis. As such, your accounting team may be spending time manually comparing books and statements to avoid balance sheet errors and check for fraud. 

The swift nature of business demands accurate accounting processes. To reconcile your cash flow statement, income statement and balance sheet, you can leverage automation tools that will compare records for you automatically. This way, you can limit human error and free up your team’s time to work on high-level analytical tasks. The role of the finance department is shifting to provide business leaders insights to make business decisions. By automatically reconciling accounts, you can boost your competitive advantage and allocate resources optimally. 

Finance Reconciliation Process: Step-by-Step 

The account reconciliation process follows straightforward steps, whether or not it’s performed manually or automatically. Here’s how it works.

Compare: The process begins by comparing all transactions noted in your internal ledger against your bank statement. 

Identify: Identify all payments that are recorded in the internal cash register, but are not reflected in the bank statement. These payments should be deducted from the bank statement because they are cash payments. For checks deposited into the bank, there may be a delay for when they are reflected. As such, you want to be sure to identify these types of transactions because they could be cause for the discrepancy.

Confirm: Once you’ve identified these types of transactions, they must be recorded. If you have receipts from the cash register that are not reflected in the bank statement, add them, and vice versa. 

Find errors: It’s unlikely, but possible, that the bank has made a mistake. This could be in the form of duplicate records, incorrect records of transactions, commissions, etc. To reconcile the bank statement to be correct, you must modify these errors by notifying the bank. 

Balance records: Once you’ve found discrepancies or resolved errors, ensure that the records are balanced and accurate. 

Account reconciliation software performs all these steps automatically by pulling data from every source of financial information, including bank statements, merchant services, credit card processors, and ERP systems. 

Reconciliation Methods 

Performing account reconciliation regularly and continuously is needed to maintain accurate statements. For whatever method you want to use, account reconciliation software can do so automatically and quickly. 

Two main methods are used to reconcile accounts, including: 

  • Document review: This involves reviewing transactions and documents to make sure that recorded amounts were spent. In most instances, businesses will use accounting software to perform document review. 
  • Analytics review: To pinpoint irregularities or fraud, analytics review leverages previous account activity frequency and history to provide an estimate of where the account should stand today. Since businesses use forecasts to estimate future revenue, analytics review can highlight when the numbers seem off from what was expected. 


Best Practices

Naturally, given the importance of financial reconciliation, there are established best practices that should be followed to get it right. Consider the following:

  • Accuracy: Documenting accurate records of transactions requires a sound internal control system. For every activity, it’s best practice to define what will be recorded and the source documents that are needed to compare statements. When you implement an automation solution, you have to set up the process and will likely have an approval process to define. For example, if an employee needs a reimbursement, then you will first want to determine what information is necessary (i.e. source documents and receipts, the employee’s name, the reason for the expense, exact amount, etc.) 
  • Error correction: No matter the reason for errors, they must be identified and resolved. To do so, this requires timely correction and processing. Again, it is best practice to outline a plan for how you will fix errors when they come to light. Everyone involved in the process should understand what’s expected from them. 
  • Matching to the source: Transactions are a source of data. It is useful to store source documentation for the reconciliation process securely. The best way to do so is in an organised manner, so receipts and information are easy to find. An automation software tool can help to organise and store financial data securely and connects to all your data systems, including legacy systems. 
  • Documenting the process: Because account reconciliation falls into the realm of audits, it’s required to document the process. Not only is documentation of the process relevant for external auditors, but it’s also pertinent for internal control and understanding of who is responsible for what. You should include the steps of the process, who performs each step, timing and procedures. One tool to use for process documentation is a flowchart or a visual representation of the process. 

How Automation Helps Finance Reconciliation 

Automation tools are helping businesses thrive and maximise their efficiency across departments. Within finance departments, automation tools are particularly useful because the nature of the business perfectly meets the criteria for automation - repetitive, data-heavy and time-sensitive tasks. 

Automation can help finance reconciliation by providing a multitude of benefits, spanning:

  • Reduces manual error: Any process that requires data and manual entry is prone to error. But, if you utilise an automation tool, you reduce the opportunity of inputting incorrect information because the software pulls data directly from the various sources. 
  • Maximises time and productivity: Reconciliation can be performed in a matter of minutes. Whether its document review or analytics review, you will be alerted to any anomalies or discrepancies as they are found. This way, your team can focus on the work they need to get done as the tool does the detail-oriented tasks. 
  • Centralised data: All data can be securely stored in one centralised place. Say goodbye to financial documents across desktops and spreadsheets and notes all over the place. 
  • Access controls: Grant access to the people within your organisation that need to review or approve transactions and accounts. 
  • Auditing and compliance: Rest assured, knowing that all data that moves within the system is stored and recorded for audit trails. You can reduce compliance risk as the exact process remains documented within the system and is standardised. 

Wrap Up 

Finance reconciliation is a standard process within every business. Since it follows a set flow of steps and is repetitive, it’s a perfect fit for automation tools. Automation software can manage your reconciliation process with greater control and accuracy, providing you with the reports you need promptly. You will be able to reduce human manual error, speed up the process and store data in a centralised location with a finance automation tool like SolveXia. 

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