Have you ever seen a difference between your monthly transaction reports and bank or credit card statements? That’s where account reconciliation comes on the screen. Completing account reconciliation ensures your business finances are accurately recorded, all financial statements are fair and true, and you have an effective internal control measure.
Our guide today will discuss reconciliation in accounting, which will help your business avoid unnecessary hassles in proving its financial statements are true.
Table of Content
What is reconciliation in accounting?
Reconciliation in accounting is financial data matching between your internal financial records and external documentation provided to you.
Let us take a reconciliation example from accounting to understand the concept.
You purchased the machinery on 31st March through e-banking and recorded this expense on your balance sheet. However, it was a bank holiday, and the transaction recording was delayed.
So, your bank statement won’t show any transactions like your balance sheet. Such discrepancies can result in mistrust during fundraising or at a shareholder meeting. To avoid such problems, monthly bank statements must be reconciled regularly.
Key takeaways
- Reconciliation in accounting is matching financial data between internal financial records and external documentation, e.g., bank statements and credit card statements.
- Mainly, businesses need to perform two types of reconciliation: balance sheet and general ledger reconciliation.
- Reconciliation must be done frequently to ensure the accuracy of financial statements.
- Accounting reconciliation illustrates your present financial standing, improves supplier relationships, and avoids late payments and penalties.
Types of reconciliation
There is no one-size-fits-all process of account reconciliation. They are of various types, and each is suited to particular needs. The two main types of account reconciliation are general ledger reconciliation and balance sheet reconciliation.
Balance sheet reconciliation
Unlike a bank reconciliation, balance sheet reconciliations are not just comparing internal account balances with their respective external documents. It refers to account reconciliation of everything from cash to investments, liabilities, and equity of all your shareholders and any accounts on your balance sheet.
If your balance sheet accounts have statements from external sources like bank statements, credit card statements, PAYE liabilities, VAT reconciliations, loan statements, etc., you must reconcile them monthly.
General ledger reconciliation
Here, you review your general ledger to check if all the entries and balance records are true. Such reconciliations include reconciling customer and vendor summaries recorded as accounts receivable and accounts payable on the ledger.
Accounts receivable reconciliation refers to verifying the accuracy of accounts receivable balances against its supporting documents like customer invoices and payment receipts.
On the other hand, Accounts payable reconciliation checks the account payable balance against supplier invoices and the company’s payment records.
Why accounting reconciliation matters for businesses
Accounting reconciliation ensures you have a good relationship with suppliers and customers. It also helps understand where businesses stand financially and accurately forecast their cash flow.
There is no perfect time for reconciliation, and it’s better to reconcile your accounts every month. Large companies can reconcile their accounts daily or weekly to avoid stress in handling large volumes of statements at month-endings. It helps you know
- Your business net worth in real-time, allowing you to make data-driven financial plans
- Any discrepancies or errors in financial records, saving you from audit penalties
- Your accounts payables and receivables allow you to avoid missed or late payments
Timely reconciliation saves you from HRMC investigations and prepares you for an audit. Reconciliation statements also show investors your true financial position and build faith for future investments.
How do account reconciliation processes work?
Account reconciliation processes compare two sets of records to ensure the financial figures match. Often, this process involves internal financial records and monthly bank statements or other statements issued by multiple external sources, e.g., credit card companies and loan departments.
For example, you purchase business goods on your credit card, and these expenses are recorded in your internal financial records. At the end of the month, you need to check that record with the statement provided by your credit card company and see if the figures match. If there are discrepancies due to pending payments or interest charges, account reconciliation helps you identify and correct them.
The accounting reconciliation process looks like this –
- Gather your records: This can be your internal financial records, bank statements, loan statements, credit card statements, etc.
- Compare the figures: Balance the numbers on your internal records and external documents to see if they match. If not, you need to identify the difference.
- Look for discrepancies: Identify errors or discrepancies by looking into outstanding checks, errors in numbers, any deposits in transit, etc.
- Make adjustments: Make the necessary adjustments to your internal records to match all your external statements. If you need to change your external statements, notify their respective providers.
Accounting reconciliation best strategies
Here are a few of the best strategies for accounting reconciliation in your company.
- Prioritise regular account reconciliation.
By conducting monthly accounting reconciliation or as frequently as your business requires, you can identify and resolve discrepancies efficiently depending on its number of transactions. This saves you from fines and penalties for late payments or facing HMRC audits due to inaccuracy in accounting statements and tax returns.
- Proper documentation and record-keeping
Keep all your statements from external sources safe and properly document them for future audits or reviews. This saves time when an auditor walks through your doors and prevents your business from losing its normal workflow.
- Automate the process
You can use the new accounting applications to automate your account reconciliation process. It saves your accountants time reviewing separate statements and matching them with financial records to check discrepancies.
It also minimises the risk of manual error, enhances efficiency, and allows accountants to focus on other core activities.
Final thoughts
To efficiently complete your account reconciliation process, connecting with an experienced accountant is advised. They thoroughly check all your internal and external financial documents, find discrepancies, and take necessary actions on your behalf. It ensures you can work with accurate financial data and make efficient business growth plans.
