Transaction Reconciliation: Process, Best Practices & Automation Tips

If the ultimate goal of every business is to make money, then it’s also equally important for businesses to ensure the money they make, and spend, is properly accounted for. That’s why almost all businesses conduct a process called transaction reconciliation on a regular basis.

Transaction reconciliation is the process of verifying and validating various financial transactions within a business, ensuring accurate financial records and compliance. This process helps companies account for all their revenue and expenditures in a given time period. But, the process becomes time-consuming, error-prone and repetitive, especially as transaction volume grows and payment processors in use expand.

Check out these tried and true best practices and tips to expedite and improve your transaction reconciliation process.

Coming Up

What is Transaction Reconciliation?

Common Types of Transaction Reconciliation

Why it's Important to Get Transaction Reconciliation Right

The Transaction Reconciliation Process

Best Practices for Effective Transaction Reconciliation

Benefits of Automated Reconciliation Software

Final Thoughts

What is Transaction Reconciliation?

Have you heard anyone say “A penny saved is a penny earned?”. This truism applies equally to household finances and businesses. One of the most effective ways for businesses to save pennies is by making sure that all company funds are properly accounted for.

That’s where a process known as transaction reconciliation comes into play. During a transaction reconciliation, companies match every transaction on their internal ledgers to the company bank and payment processor statements.

Merchants utilize internal accounting systems alongside bank statements and payment processor reports to match transactions and resolve any discrepancies that may arise.

This is a key element of corporate governance. Some companies also refer to this as a bank reconciliation, or an account reconciliation. No matter what it’s called, the reconciliation process is a mission critical function for a company’s accounting staff.

Unfortunately, as companies get larger and conduct more transactions, reconciliation gets exponentially more difficult and prone to be derailed by human error.

The irony here is that truth only underscores the necessity of routine account reconciliations. Finance automation solutions account reconciliation workflows are paving the way for streamlined account reconciliation workflows with utmost accuracy.

Common Types of Transaction Reconciliation

Although almost all reconciliations deal with money or inventory (which represents money), there are several different types of reconciliation a company may conduct. Understanding how to reconcile accounts properly for each type is essential for maintaining financial accuracy.

Bank Reconciliation

Bank reconciliation is perhaps the most common type of reconciliation in accounting. During this process, accounting staff match the company’s ledgers against bank statements, including all bank transactions such as ACH deposits, wire transfers, payments by check, and auto-payments. Regular bank reconciliation helps companies quickly identify discrepancies and prevent fraud.

Payment & Credit Card Reconciliation

Payment reconciliation involves matching transaction records across payment systems to ensure accuracy. This includes credit card reconciliation, where companies verify that card transactions in their internal records match the credit card statements from card providers. This reconciliation process is crucial for businesses that process high volumes of card transactions and use multiple payment processors.

Account & Vendor Reconciliation

Account reconciliation ensures that general ledger balances are accurate and match supporting documents. In vendor reconciliation, companies compare their accounts payable records with vendor statements to verify all purchases and payments are correctly recorded in the accounts payable ledger. This helps businesses maintain good supplier relationships and avoid payment errors.

Inventory & Intercompany Reconciliation

Inventory reconciliation is critical for retail businesses or operations that market consumer goods. Every item in a store’s inventory is connected to a purchase cost and should generate specific profits when sold. When reconciling transactions related to inventory, companies verify that physical counts match system records.

Intercompany reconciliation focuses on transactions between different entities within the same parent company, ensuring all internal transfers are properly documented in each unit’s financial records.

Why it's Important to Get Transaction Reconciliation Right

Proper financial reconciliation serves as the foundation of sound business management and helps protect companies from both internal and external threats to their financial integrity. Accurate reconciliation contributes to a company's financial health by ensuring precise financial records, which support decision-making, meet regulatory obligations, and establish trust among stakeholders for sustainable growth.

Business & Compliance Importance

Transaction reconciliation prevents catastrophic financial errors, such as misdirected funds or undetected embezzlement. Company shareholders, regulators, and tax authorities expect internal ledgers to match bank statements as evidence of proper financial management. Financial reconciliation may be the single most effective way companies can maintain financial integrity and meet stakeholder expectations. Additionally, effective transaction reconciliation helps businesses meet regulatory requirements, ensuring compliance and facilitating audits.

Risks of Inaccuracy or Manual Errors

Manual reconciliation processes create significant vulnerabilities. Human error in data entry can cause costly mistakes that delay the entire reconciliation process. Missing transactions can occur when there are discrepancies between accounting records and actual transactions, making it crucial to identify and address them to ensure financial accuracy. The time-intensive nature of manual reconciliation creates bottlenecks in accounting workflows. Additionally, placing reconciliation responsibilities with just a few employees increases fraud risk and creates dangerous key-person dependencies that can disrupt operations when staff changes occur.

The Transaction Reconciliation Process

The fundamental steps of financial reconciliation are similar across most companies. While specific procedures may vary depending on the type of business, the core reconciliation process follows a consistent framework, emphasizing the importance of matching transactions recorded in accounting systems with statements or documents to ensure accuracy. Here’s how to reconcile accounts effectively:

Step 1: Gather Financial Documents

The first step in any account reconciliation is determining the time period for which you’ll be reconciling transactions.

As a general rule, begin with the first day after your last reconciliation report. Then gather all relevant financial documents (statements, receipts, invoices, ledgers) for that period up to the present day. Organizing these supporting documentation systematically will streamline the reconciliation process significantly.

Step 2: Match and Review Transactions

Compare every transaction from your company ledgers and financial records to the corresponding external records (such as bank statements) for the reconciliation period.

Ideally, each transaction should appear in both sets of records, with all funds perfectly accounted for at the end of the reconciliation. Detailed transaction details are crucial for this process, as they help in identifying and resolving discrepancies. Payment reconciliation software can automate this matching process, saving significant time and reducing errors.

Step 3: Resolve Discrepancies

When records don't match (which happens for various reasons), accounting staff must investigate to determine why. This investigation might involve:

• Checking for timing differences between when transactions were recorded and processed
• Identifying missing or duplicate entries
• Verifying transaction amounts and categories
• Consulting with departments involved in problematic transactions

After identifying discrepancies, the books must be adjusted accordingly—usually with journal entries—until all transactions are properly reconciled. As businesses grow and use multiple payment processors (Amazon, Stripe, Worldpay, etc.), this step becomes increasingly complex without dedicated reconciliation software.

Step 4: Record and Approve

Once all accounts have been reconciled, compile the supporting documents along with the final reconciliation report into a comprehensive record. This documentation should:

• Detail any adjustments made during the reconciliation process
• Include explanations for significant discrepancies
• Provide clear evidence of the reconciliation work performed

Have this documentation reviewed and signed off by authorized accounting staff before adding it to the company's official records. Proper documentation not only satisfies audit requirements but also provides valuable insights for improving future financial processes.

Best Practices for Effective Transaction Reconciliation

No matter what type of business is being reconciled, or what kind of reconciliation is being done, there are some best practices that are essential aspects of a professional account reconciliation. Performing reconciliations on a monthly basis is crucial to enhance the accuracy of financial records and facilitate timely error detection.

1. Focus on Accuracy

The first one, of course, is maintaining accurate financial records. Every transaction should be entered accurately into the company ledger, and matched to a corresponding source document such as a bank record and/or signed expense authorization.

It’s also critically important to match dollar amounts of transactions, even though that can be tedious.

2. Standardize the Process

Every reconciliation must also have a clear procedure for error reporting and correction. It is almost inevitable that in a large company, there will be transactions that don’t match to bank records for the corresponding accounting period.

Whether this discrepancy is down to a difference in the bank statement period and the company reporting period, or an error, the accounting staff should have a way of forensically working back through transactions to arrive at the source of the error.

There must also be a method for recording the resolution and explanation of the discrepancy.

3. Centralize Reporting

Finally, the reconciliation, and all supporting documents must be compiled into one single, unified report. It should be titled and stored in chronological sequence from the last reconciliation.

The report should also include a complete summary of who participated in the reconciliation (e.g., which departments), the methodology and sign-offs from the appropriate parties. Accurate financial statements are crucial in this process to ensure the integrity of the report and to identify any errors or discrepancies.

4. Leverage Automation

Overall, the greatest advice to accurately and consistently perform transaction reconciliation properly is to leverage automation technology.

This technology was designed to overcome the common challenges of reconciliation and make the process easy and straightforward with the aid of easy-to-use tools. With automation, you get to remove manual tasks so your team can focus on strategy and better decisionmaking capabilities. 

Processes are completed 100x faster and 90% fewere errors. The modern cloud architecture makes it possible to connect your existing technologies so that no data gets lost in the shuffle. 

Benefits of Automated Reconciliation Software

Transaction reconciliation is a catch-22 for many companies. It is a vital function that must be done accurately, but the high quality accounting personnel who can do it are in very high demand.

You want to have continuity in the process, but not so much that any one well placed accounting employee becomes such a fixture at your company that they could theoretically conduct impropriety under your nose without you becoming aware of it for an extended period of time.

Since many of the stress points with transaction reconciliations come when human hands touch the process, an automated reconciliation solution is something worth considering. Automated reconciliation offers a host of potential benefits, which include enhancing cash flow management by reducing delays and inaccuracies.

1. Accuracy

Most automated reconciliation software tools are powered by a strong artificially enhanced computer brain that inputs and scans thousands of transactions at a time with a zero percentage error rate, ensuring accurate financial records. This will make the process much quicker, and produce reliable results every time.

2. Less Human Interaction

Aside from the possibility of error, the other issue with human interaction in account reconciliation is that it’s probably not the best use of time for a company’s accounting staff. Automated reconciliation software can handle almost all the data input or human activity to reconcile payments.

That means your accounting team only needs to be involved in finding the source of discrepancies and solving them, instead of also needing to find them.

3. Fraud/Impropriety Prevention

Automated reconciliations are not going to try and shave money off the company books to pay off gambling debts or other expenses, but sadly, humans might. 

The use of an automated tool for reconciliations drastically reduces the chances that a dishonest or rogue employee will commit acts of fraud or impropriety with company funds. 

4. Ability Scale Upwards

As companies expand, reconciliations can become increasingly more difficult. This is especially true if there are branches in different time zones or even different countries, all of whom may conduct their reports at different times.

Automated reconciliation software allows companies to scale upwards from a two or three person team to a multinational operation. All the while, you are removing key person dependencies and ensuring that your processes never get delayed or stuck waiting on anyone to perform. Additionally, automation helps manage increasing transaction volumes, streamlining processes to handle the growing challenges businesses face.

5. Compliance and Reporting

Many businesses have regulatory authorities they are required to report to. This is of course, in addition to the state and federal tax authorities.

Automated reconciliations will not only complete this work accurately, it can be used to generate reports and audit trails (with version control) that are necessary for the company to remain in compliance with the governing rules for its industry. Automation also helps meet financial regulations by ensuring the accuracy of financial statements and preventing issues such as fraud and improper tax filings.

In either case, preparing reports after an automated reconciliation is as simple as the push of a button.

6. Remote Storage

Many companies are required to maintain records for a certain amount of years.This can take up a tremendous amount of space.

However, most automated reconciliation software offers users the ability to upload reports to cloud storage with bank-grade security, where they can be accessed on demand. Records related to the petty cash fund can also be stored remotely, ensuring that petty cash reconciliation is accurate and easily accessible.

Final Thoughts

Transaction reconciliation is something that every business has to do in one form or fashion. Without it, the business can never be sure how much money it’s making or how much money it has at a given point. However, that doesn’t mean the reconciliation process has to be painful.

Companies can take advantage of a no-code, out-of-the-box software solution that can automate transaction account reconciliation, reporting and a host of other essential company functions. The best part is it can be setup and used without needing IT.