Your ability to make sales is what keeps your business running. With the sheer amount of payment processors and volume of transactions occurring on a daily basis, it makes sense why sales reconciliation should be a top priority. You want to make sure that all transactions are properly recorded, paid, and closed out to move into the next accounting period with clarity and accuracy.
Here, we will talk about the reconciliation process, the various types of reconciliation, and how to streamline the process using automation solutions.
Reconciliation is the process of comparing transactions recorded internally to documentation from external sources, such as bank statements and credit card statements, for example.
A pivotal part of the reconciliation process is correcting any discrepancies by finding the source/reason for the mismatched records.
Reconciliation is incredibly important for businesses of all sizes so that they can be sure their correct balances are stated in their accounts at each month's end.
Sales reconciliation is performed by companies all over the world, and yet, there's a standard set for how it must be done. In America, the generally accepted accounting principles (GAAP) call for double-entry accounting. In this style of accounting, every transaction is recorded twice in the general ledger, once in a credit account and another entry to match in the debit account.
With the double-entry accounting method, the credits and debits should end up being equal, and thus, balancing out.
If you don’t use double-entry accounting, then you’ll execute reconciliations with the account conversion method in which you compare records like receipts or statements to the entries in your business’ general ledger.
With the influx of transactions and payment options, it’s no wonder that there isn’t just one type of reconciliation. You’ll want to make sure all your ducks are in a row, so to speak. Here’s an overview of some of the types of reconciliation:
The most common type of reconciliation process, bank reconciliation entails comparing the bank statement’s transactions to those in the internal accounting software to ensure they match up.
The process of comparing balances owed on statements provided by suppliers to transactions in the payable ledger and overall balance. You may have to request a supplier statement as they aren’t automatic (like bank statements are).
If you’re a business offering credit terms to your customers, you’ll want to perform customer reconciliation to make sure your accounts receivable ledger watches up to invoices and payments
Cash reconciliation is performed to check that funds are being properly spent out of the petty cash box
There’s no doubt that you want your financial statements to be accurate and that you want to have confidence in your business’ financial health. Sales reconciliation helps to make sure this is the case.
By performing reconciliations, you’ll be able to gain the benefits of:
For businesses that are growing or established, the challenges of payment reconciliations look the same. Multiple payment providers can become tricky to keep track of, and since each system is set up with their own data formats, it’s not always straightforward to combine and transform data as needed.
Automation tools can pull data from all payment providers automatically, mapping and cleansing the data allowing for reconciliations and payment tracking to be done significtnely faster and with 98% fewer errors. It enables a business to scale, and streamlines the data collection, transformation, and reporting process.
Regardless of the type of reconciliation that you choose to perform, there are key steps you’ll follow. These consist of:
Every reconciliation begins by accessing your data. That could be bank statements, credit card statements, payment processor statements, or whatever you’re choosing to reconcile against. Then, you’ll also need your general ledger and internal accounts.
Next up, you’ll compare every record side-by-side. This is likely to be a lengthy process if performed manually and can result in many errors. Alternatively, you can use an automation solution to execute your reconciliation in a fraction of the time and with 98% better accuracy. You’ll also receive alerts if you need to take action.
For any discrepancies, you’ll investigate to find the source or reasoning behind the difference. Then, you rectify and record the update so that balances will match. The process may result in a reconciliation report that summarises what was done or adjusted so that everyone is aware of the changes that were made and the reasoning behind them.
There are two main reconciliation methods to choose from. These include:
In this method, you’ll compare transactions and documents. While this can be performed manually, you can save time and reduce errors by automating the process.
A less common method for reconciliations is to perform analytics review. In this set-up, you review previous account activity and historical activity to estimate what your ending balances should be in the account.
If you notice any errors or the actual amount is far off from the estimation, then you’ll dig in to find the source of the discrepancy or potentially missing transactions.
As a result of the month-end close process, your business’ management team, stakeholders, investors, and lenders are able to get a sense of how the business is performing. Reconciliation serves as the needed proof to solidify all revenue that has been recognised and recorded in the period.
Accounts receivable reconciliation matches the unpaid customer billing to the accounts receivable statement in the general ledger. It’s a critical step in being able to “close the books.”
The purpose of reconciling accounts receivables is to mainly make sure that you get paid exactly what you are owed!
There are many sales reconciliation errors that can occur throughout the accounting processes that take place, so accounts receivables serve as your checks and balances.
Errors may include:
Essentially, the way that customers can pay for your goods and services is only growing. While that supports more accessibility to sell, it also opens the doors to more mistakes and more complex tracking requirements.
Automated accounts receivable reconciliation eases the burden to make sure that everything aligns at the end of each accounting period, especially if you have a high volume of transactions or use multiple payment providers.
Once the accounts receivable reconciliation has been completed, you may notice differences in the amounts. This could occur if and when:
Reconciling accounts receivable can be performed by following these steps:
Pull together internal documents like the general ledger and external documents to confirm the opening balance on the internal source agrees with the closing balance of the external document.
If there’s a difference between the closing balance of each account, make note of the gap. This value is what will need to be reconciled in order to close the account.
For your internal account receivables account, be sure to record any new transactions that you find on the external document.
Once you have reconciled the accounts and the closing balances are in agreement, you can close the books. If there are timing delays or explainable differences that are pending, produce a reconciliation report that makes note of this. With this handy, it’ll make it easier to reconcile accounts during the next closing process.
The biggest pitfall you’ll run into when performing revenue reconciliation is a lack of information. Accountants may be unaware of what products, bundles, and delivery methods are available to customers. They need this information to understand how to record deferred revenue and revenue properly.
Accountants should be aware of the business model, for starters. Additionally, they should have access to up-to-date data. With an automation financial solution, you can grant access controls so that accountants and finance teams have everything they need to get the job done without having to dig and search for the information that they require.
You can also standardise your sales reconciliation process with automation.
Revenue reconciliation is further complicated by revenue received from multiple payment providers, a large volume of transactions, and low value transactions across many sources, like Shopify, PayPal, Amazon, and the like.
Automation solutions standardise and streamlines the process by pulling the data from every source, cleaninge and mapping the data to reconcile in a fraction of the time, and prevent manual errors from occuring.
With these capabilities, companies can focus their energy on scaling and increasing revenue as opposed to being bogged down by manual, repetitive, and time-consuming tasks.
For most businesses, accounts receivables reconciliation takes place as part of the month-end closing activities before businesses issue financial statements.
It’s always recommended to perform account reconciliations in consistent intervals. At the very minimum, it should be done at least once at the end of the fiscal year.
Since sales reconciliation is something you’ll do on a recurring basis, it’s recommended to standardise the process and streamline the workflows as much as possible. The easiest way to accomplish this is to implement an automation tool to do the hard work for you!
Additional best practices include:
Make sure that all transactions were authorised in the first place.
Since reconciliation ensures the accuracy of accounts in advance of financial statement procurement, you won’t want to delay the process.
If you have revenue coming from various sources/payment providers, an automation tool will pull together all your data sources and format it such that you can easily track your revenue in a centralised location.
Have a plan and outlined process for correcting errors so everyone is on the same page across departments and locations.
Remain consistent with your process and try to have reconciliation scheduled for the same time each month, quarter, or year.
Automation helps to ensure that all of these best practices are implemented in practice. Automation software saves time, reduces errors, streamlines reconciliation processes, and removes key person dependencies.
Sales reconciliation is a surefire way to know that your financial statements are reflective of reality and to gain a firm grasp of your business’ financial health. Whether you deal with a few transactions or plenty, you’ll want to make sure that your books are in order and that all decisions you made are based on up-to-date information.
As payment processors proliferate and more digital methods of payment enter the business landscape, it is increasingly valuable to execute account reconciliations with consistency.
Automation software eases the workload so that your finance team and accountants can instead allocate the bulk of their time to tasks that require human thought, rather than tedious data entry and transaction matching.
Automated processes shift the landscape for businesses and provide them with an unparalleled edge. Here’s how you can implement automation.
Workflow automation can be a game changer for any industry by streamlining processes, boosting productivity and increasing accuracy.