Reconciliations: Process & Methods for Success

The definition of reconcile is, “to make consistent  or congruous.” When you apply this to financial statements and documents, you can immediately understand the implications and importance of doing so. There are various types of reconciliations you can perform within your personal finances and business finances.

Let’s take a look at the best practices and tools you can use to help you optimise your reconciliation processes.

Coming Up

1. What is Reconciliation?

2. How to Understand Reconciliations?

3. What are the Types of Reconciliation?

4. Why Reconcile Accounts?

5. What is the Reconciliation Process?

6. What is an Example of Reconciliation?

7. What are the Reconciliation Methods?

8. How to Go from Manual Reconciliation to Automation?

9. What are the Concepts and Best Practices of Reconciliations?

10. How to Reconcile a Bank Statement?

11. What is Balance Sheet Reconciliation?

12. What are the Benefits of Reconciliation Software?

13. What are the Best Reconciliation Tools?

14. Final Words

What is Reconciliation?

The accounting process of reconciliation is performed to match records from different accounts with one another. Within businesses, you of course always want your general ledger and internal accounts to accurately reflect the reality. This is because you look to these documents to understand your financial health and assess what risks you can and cannot take given the circumstance.

Account reconciliation provides you with a method to know why records may be different at any given point in time. With this knowledge, you can either modify the records or recognise the cause for error and correct it.

There may be reasons why the balances don’t match that are completely acceptable, such as the timing of your deposits. Or, there could be more detrimental reasons for discrepancies, like fraud. In these instances, the value of account reconciliation is heightened.

How to Understand Reconciliations?

Reconciliations can be performed in a variety of ways. While there does not exist a single and specified standard procedure, it’s common for the generally accepted accounting principles (GAAP) to be upheld.

In practice, this refers to the double-entry accounting method by which any transaction within a business gets documented in two different places within the general ledger.

By using double-entry accounting, the possibility to perform account reconciliation and compare the two sets of records becomes feasible. This means that every transaction exists once as a debit and once as a credit (in two different accounts that will appear on different statements like the balance sheet and income statement, for example).

What are the Types of Reconciliation?

As alluded to just a few moments ago, there are a handful of types of reconciliations that any individual or business can conduct. Let’s quickly review what these entail:

Personal Reconciliation

Individuals can choose to perform reconciliation within their own finances by comparing checkbooks and credit card accounts with their physical receipts or bank statements. People may choose to do this to spot fraudulent activity, rectify incorrect fees, or highlight any potential errors that their bank or credit card company may have committed.

Business Reconciliation

Business reconciliation happens in consistent intervals, which may be daily, weekly, monthly, quarterly or annually. For balance sheet reconciliations, it’s common to occur at the close of each month. Depending on the type of reconciliation performed, frequency will vary. Companies can use reconciliation to check that cash inflows and outflows are accurate, spot fraud, and avoid negative opinions from auditors. These days, most organisations are leveraging the power of automated reconciliation so that the process can be done efficiently and accurately.

Bank Reconciliation

Bank reconciliation compares a company’s internal financial statements with their bank account balance.

Vendor Reconciliation

Vendor reconciliations check that a supplier’s balance is equal to what is documented on the entity’s payable ledger and overall balance owed.

Customer Reconciliation

If a business provides customers with credit terms, then customer reconciliation checks that the accounts receivable ledger and receivables control account in the general ledger agree.

Intercompany Reconciliation

When a company exists under the umbrella of a larger group, then intercompany reconciliation helps the parent company ensure that consolidated accounts are accurate.

Why Reconcile Accounts?

Many organisations are utilising automated software like SolveXia to reap the benefits of account reconciliation without having to waste resources doing so.

Reconciling accounts on a consistent basis will help your business be able to:

• Reduce fraud
• Upkeep solid relationships with suppliers and vendors
• Avoid having to pay penalties from banks
• Rectify any accounting mistakes that could have serious implications on your business
• Adhere to regulations
• Document your processes

When you reconcile accounts, you’re made aware of the current status of your finances. You’re able to know how much cash is readily available, ensure that all transactions are being properly recorded, and can avoid bounced checks that cost money. With a clearly defined process for reconciliation, your business benefits from increased internal control and oversight.

In most instances, it’s up to the financial department and/or business leaders to dictate how frequently reconciliations are to be performed. For businesses with a high volume of transactions, it makes the most sense to reconcile accounts more frequently because of the amount of information involved.

Whether you’re running or working within a large or small business, automated reconciliations will save your team time and money.

What is the Reconciliation Process?

Although there’s a lot of freedom in designing your reconciliation process and choosing the right tools to help you do so, there are some steps that will undoubtedly be involved in the process.

When you implement an automated tool such as SolveXia to aid in reconciliation, then you avoid having to manually pull together all the records and match them one-by-one. Instead, the system will do all the data collection for you and can very quickly match records.

Within a business setting, account reconciliation tends to occur at the close of a financial period. Accountants will review every account in the ledger with independent sources of data like bank statements. Before a company can verify that its financial information maintains integrity, reconciliation must occur.

On a step-by-step basis, this is what the account reconciliation process typically involves:

• Comparison: Take a look at the records within your register compared to that of your bank statement. If there’s something that cannot be verified as an accurate transaction, make a note of it.
  

• Outgoing funds: There are some outgoing funds that may not have yet been displayed on a bank statement because of the timing from when the statement was created automatically by the bank. For example, ATM transactions or checks may not be appearing. Be sure to deduct those amounts from the balance that appears on your bank statement.
  

• Incoming funds: If there are incoming funds that have yet to be recorded, such as account credits, then add them to the statement. This could also happen in the case of earning interest.
  

• Error detection: Check for mistakes on behalf of your own accounting or the banks.

• ‍Check balances: As the culmination of the reconciliation process, general ledger accounts and external statements should display the same balance. If something still isn’t right or able to be explained, then the reconciliation process must be revisited before signing off.

What is an Example of Reconciliation?

With double-entry accounting, we can witness an example of reconciliation when an entity must purchase assets for the business. This purchase will exist on both the income statement and the balance sheet. For the cash account, the amount used to purchase the assets will be reflected as a debit in the cash account. Since you’re purchasing assets, then the same amount must be noted as a credit in the asset account.

What are the Reconciliation Methods?

The two main methods for reconciliation include:

Documentation Review

In most instances, document review is carried out by software. However, it can be performed manually. This method involves comparing existing transactions with physical documentation of the transaction to ensure that the recorded data is right. To exemplify, an organisation may rely on receipts for comparison’s sake.

Automation software is able to pull records and documents from various sources through integrations and APIs. So, rather than having to sift through a large pile of paper, when you utilise technology to upload or record transactions, you’ll save physical space and time.

Analytical Review

Although it's less commonly used than document review, analytical review is another method for reconciliation. This method is based on historical data and forecasted activity. While it’s impossible to say what’s going to happen in the future, automation software can use statistical models to provide mostly accurate estimations.

In this method, accounting errors may be recognised when the forecasted amount varies greatly from the actual amount in your company’s balances. After further review, you may find it was a simple mistake like a typo, or something more serious, like fraud.

How to Go from Manual Reconciliation to Automation?

It’s always important to pay close attention and allocate adequate oversight into your account reconciliation practice. For starters, various countries have specific legislation that regulate reconciliations, especially when it comes to publicly traded companies. These regulations are put into effect to protect shareholders and the public from fraud.

Additionally, reconciliations add a layer of protection so that your business can be sure all financial information is correct. With spreadsheets and human hands, account reconciliation is doable, albeit inefficient.

The manual reconciliation process will involve a lot of time that could otherwise be spent on creative problems and strategic direction. Due to the nature of the work, it’s also error-prone.

By introducing an automation solution into your organisation, you can transfer these tasks to a robot. While the robot won’t entirely replace your human resources, it will greatly help in achieving operational efficiency by completing reconciliation in a fraction of the time with less mistakes.

For many organisations, the introduction of a no/low code solution like SolveXia allows them to automate the reconciliation process straight out-of-the-box for a relatively low cost that doesn’t require the expertise of an IT team.

What are the Concepts and Best Practices of Reconciliations?

By reviewing the key concepts and best practices involved in reconciliation, it becomes even more clear as to how an automation solution should be the only way forward.

Let’s take a look at some of the concepts involved in reconciliation and see how systems like SolveXia guarantee their existence:

• Accuracy: You’ll need to verify that every transaction is accurate and for an allowable amount or service. If authorisation was done through paper approvals, then this may be more difficult to prove. Instead, when you use a solution that can provide process automation and reconciliations, everything is stored within the centralised system and can easily be pulled for review.
  

• Errors: If and when errors occur, it’s paramount to rectify them quickly so that issues don’t grow bigger over time based on the incorrect data. With an automation solution, you will be notified as soon as something off is detected. This means that you can fix a problem in real-time rather than running the risk of only knowing it exists once it’s too late.
  

• Documentation:  Reconciliation is a process that will continue to happen within your business. You’ll want to be able to review that it has been completed properly before signing off on its completion. Within a software system, you can be sure that every step along the way happened as it was supposed to so that the final approval and signoff is made with confidence.

• ‍Accountability: It’s likely for multiple hands to be involved in reconciliation. While one person generally bears the burden of the final sign off, various people and their actions can impact the results. By creating the process in an automated solution, you clearly outline the expectations and responsibilities of each party.
  

How to Reconcile a Bank Statement?

To execute a bank statement reconciliation, you’ll need two documents for review, namely the balance sheet and your bank statement. You’ll focus on the cash balance of both to ensure that they match.

However, the general ledger and bank statement may not match. This is the process of reconciliation, which involves identifying why there are differences. You’ll compare deposits. Be sure to take into account any outstanding checks or deposits in transit. Additionally, within your general ledger, make note of any service fees or charges, along with NSF checks or errors in the cash account.

In an ideal world, you would conduct bank statement reconciliations every time you receive your bank statement. Depending on your transaction load and business size, this could be performed daily, weekly, or monthly. To make it easier on your business, see how bank statement reconciliations could be automated with our solution.

‍What is Balance Sheet Reconciliation?

Balance sheet reconciliation is the process of reconciling the closing balances of all accounts that appear on the balance sheet. This is a crucial and final step that occurs in businesses in order to produce accurate financial statements and close the books for the cycle.

You have the option to use the T-format (horizontal format) or vertical format. The benefits of balance sheet reconciliation include:

• Rectifying any accounting errors
• Understanding the financial status and strength of your business
• Knowing the actual cash balance of your business
• Supporting transparency of transactions

When conducting manual balance sheet reconciliations, there could be potential issues because the reconciliation depends on the data. So, if the data has been inputted with errors, then the reconciliation will be inherently involved. This is why so many businesses trust automated solutions to pull data, transform data, match records, and provide a clear check on such important statements.

What are the Benefits of Reconciliation Software?

Regardless of the type of reconciliation you need to perform, from bank statement reconciliations to general ledger reconciliations, reconciliation software is changing the face of businesses.

Reconciliation by hand can take an enormous amount of time. Firstly, it’s necessary to source data from various locations. Once your team has located the proper documentation, they will have to go through it line-by-line. Even after this is done and any necessary investigations have been made, their process will most likely need to be reviewed by someone higher up.

All of this is timely, and in effect, costly. Manual reconciliations also run the risk of suffering from bottlenecks. Since it’s essentially an approval process, the key person who needs to sign off or review the documentation may be sick or out of office. Or, due to the enormous amount of paperwork involved, it could quite literally get lost in the shuffle.

With reconciliation software, the system can import all relevant data from disparate software. This includes credit card statements, bank statements, internal ledgers, ERP, and more. The data is compared and matched in no time. Only if there happens to be something that calls for investigation will you be notified to look further into it. The system can do everything from pulling data, comparing records, and then submitting the final reconciliation to the responsible party for sign-off.

What are the Best Reconciliation Tools?

We’ve gone into detail about the best reconciliation tools in our complete guide here.

As a refresher, when looking for the right technology partner to select an automation tool, you’ll want to look for one that contains these features:

• Reporting: The system should be able to pull reports from the past, compare current data, and provide reports in a timely manner for your review.
  

• Rollover: If there’s an issue in the current accounting period that needs to be rolled over to the future to be resolved at a later date, the system should have issue management and be able to store that data.
  

• Classification: You should have the option to classify and assign type classes to records during the matching process.

• ‍Transaction matching: Every type of account that you work with can have its own set rules and policies. If variances occur (for example in analytical reconciliation), then there should be the option to set your tolerance levels.
  

A few popular tools include:

• Xero: This tool is best suited for mid to large businesses and allows you to view cash flow in real-time.
  

• Bank Rec: Bank Rec is a great tool for reconciliations that carries out transaction matching. You have the ability to set up your matching rules. There’s no fees to set up and each monthly subscription is good for up to 5 users.
  

• ReconArt: ReconArt is specifically designed to handle any type of reconciliation. The software is only good for this purpose, and it can be either web-based or hosted on-site.
  

• Blackline: Blackline’s product includes reconciliations as part of its tool. It has the capacity to store a great volume of data and is well-suited for global teams looking to standardise their process.

• ‍SolveXia: SolveXia’s solution has reconciliation as just one offering within the tool. SolveXia has helped to transform financial departments and teams by providing account reconciliation, along with process automation, data processing, auditing, analytics, and more. The tool can pull data in whatever format it is available and perform complex matching in seconds. In less than 30 minutes, the system can be up and running.

Final Words

You wouldn’t ever want to run a business without performing reconciliations. At the same time, the same can be said about automated reconciliations. Reconciliation software takes the pain out of manual reconciliation, transforms your teams capacity, and allows you to have utmost confidence in all the data that runs in and out of your organisation.

See how a tool like SolveXia can take your business to the next level by executing your account reconciliations and so much more!

To see how SolveXia can help your company perform its reconciliations, request a demo!

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