Why Is Reconciliation Important in Accounting?

15 Mar Why Is Reconciliation Important in Accounting?

For example, a schedule with beginning balance, cost of new insurance policies or renewals received minus amounts amortized for time usage creates the new ending balance for prepaid insurance. The ending balance in the schedule should agree with the general ledger balance. Annual SaaS subscriptions are another example of prepaid assets amortized over twelve months as each month elapses. The first item of business should be to see what expenses make up that $5,000.

When all your information is correct, you’re less likely to miss deposits or mistakenly overdraft an account because of a lack of funds. You’ll know exactly how https://www.quick-bookkeeping.net/ much money you can budget for vendors, operating expenses, and other payments. There are two main ways of going through the process of account reconciliation.

Reconciling to External Documentation

According to Investopedia, the definition of account reconciliation is “an accounting process that compares two sets of records to check that figures are correct and in agreement. Account reconciliation also confirms that accounts in the general ledger are consistent, accurate, and complete.”  Reconciliation provides a check on the completeness of your financial data. BlackLine Transaction Matching further automates processes by enabling the comparison and validation of transaction-level account data.

The customer reconciliation statement serves as proof that there’s no material inaccuracy in the accounts. As with deposits, take time to compare your personal records to the bank statement to ensure that every withdrawal, big or small, is accounted for on both records. If you’re missing transactions in your personal records, add them and deduct the amount from your balance.

1. While scrutinizing the records, the company finds that the rental expenses for its premises were double-charged.
2. The company lodges a complaint with the landlord and is reimbursed the overcharged amount.
3. This process involves reconciling credit card transactions, accounts payable, accounts receivable, payroll, fixed assets, and subscriptions to ensure that all are properly accounted for and balanced.
4. Make a note of all transactions on your bank statement for which you don’t have any other evidence, such as a payment receipt or check stub.

All businesses must identify errors, whether they occur in data entry, at the bank account level, because of omission, lack of information, duplication, or for some other reason. All businesses are vulnerable to unscrupulous employees, cyber-theft, and dishonest customers, vendors, or suppliers. Account reconciliation can help prevent fraudulent activity by identifying such common practices as duplicate checks, unauthorized credit card activity, or altered invoices. Account reconciliation is an important process to ensure the validity and accuracy of all financial statements.

For example, real estate investment company ABC purchases approximately five buildings per fiscal year based on previous activity levels. The company reconciles its accounts every year to check for any discrepancies. This year, the estimated amount of the expected account balance is off by a significant amount. The documentation review process compares the amount of each transaction with the amount shown as incoming or outgoing in the corresponding account. For example, suppose a responsible individual retains all of their credit card receipts but notices several new charges on the credit card bill that they do not recognize. Perhaps the charges are small, and the person overlooks them thinking that they are lunch expenses, for example.

Step 2: Start a reconciliation

Once the errors have been identified, the bank should be notified to correct the error on their end and generate an adjusted bank statement. While the entries in the general ledger are based on the facts of the moment, they may not always be accurate. But there are chances that the check could have bounced due to numerous reasons. Or the payment you made to supplier A went into the accounts of supplier B due to a clerical error. Automating your accounts reconciliation process doesn’t mean that you can dismiss your accounting team overnight or improve efficiencies twofold immediately.

The rules vary depending on whether the thief used just your account number or your physical ATM or debit card. In the first instance, you aren’t responsible for any transactions you didn’t authorize as long as you report them within 60 calendar days after your statement was sent to you. So, thoroughly checking the capabilities of the AI solutions you shortlist is crucial. If you answered ‘Yes’ to all the questions above, your organization is pretty much ready to embrace AI. For further confirmations and checks on how you can implement AI, don’t hesitate to sign up for a free consultation with our AI experts.

Finance teams achieve this by reconciling accounts directly, and updating cash flow statements with detailed transaction information. Alternatively, they might reconcile accounts indirectly by examining the overall picture of these transactions in income statements and balance sheets. Account reconciliation is typically carried out by accountants during monthly and year-end financial closing processes. Alternatively, businesses may opt for real-time reconciliation using specialized automation software integrated with their ERP (Enterprise Resource Planning) system.

There could be a variety of issues that caused the expenses to jump so dramatically. The chance for AI to empower small and medium businesses, and accountants, is huge. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling https://www.kelleysbookkeeping.com/ and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. Accurate information reduces the risk of missing deposits or accidentally overdrawing accounts, allowing for better budgeting.

This procedure ensures that the business’s internal records align with external data. Also, transactions appearing in the bank statement but missing in the cash book should be noted. Some of the transactions affected may include ATM service charges, check printing fees. The analytics review method reconciles the accounts using estimates of historical account activity level. It involves estimating the actual amount that should be in the account based on the previous account activity levels or other metrics. The process is used to find out if the discrepancy is due to a balance sheet error or theft.

Other Examples of Account Reconciliations

This not only keeps operations running smoothly but also helps avoid unnecessary financial strain or surprises. Moreover, internal account reconciliation enhances financial transparency and accountability, critical for building trust with stakeholders, whether they are investors, customers, employees, or vendors. Ultimately, regular and efficient account reconciliation contributes significantly to the financial stability and success of a business. Peakflo’s Accounts Receivable and Accounts Payable automation accelerates account reconciliation by streamlining manual repetitive processes and providing a centralized repository for all financial data. Reconciliation helps identify and fix errors like misapplied payments, ensuring accurate financial information.

For large and small to mid-sized organizations, timing issues are a key challenge, most often in areas such as bank deposits and payments to vendors. If account reconciliations are being performed during the period-end close process, it can also be challenging to reconcile data that’s changing day-to-day or hour-to-hour during the close. Check that all outgoing funds have been reflected in both your internal records and your bank account.

Chapter 4: How To Choose The Right Automated Account Reconciliation Software?

If there are receipts recorded in the internal register and missing in the bank statement, add the transactions to the bank statement. Consequently, any transactions recorded in the bank statement and missing in the cash register should be added to the register. Nearly a third of the businesses are gearing up to digitally transform their accounting operations using a slew of technologies, including cloud, AI, analytics, and RPA. But the digitization of the accounting processes, including account reconciliation and financial close, requires strong back-end data management policies and infrastructure.

Account reconciliations are typically done at the end of an accounting period, such as at the time of the monthly close. This ensures transactions that are being closed out are properly verified and the closing statements are accurate. Recording inventory (and related accounts payable) transactions may lag, requiring accruals through a cut-off date after month-end.

As such, a $900 error should be noted in the reconciliation and an adjusting journal entry should be recorded. The trial balance that lists and totals general ledger account balances should have equal debit and credit totals to reflect double-entry accounting and posting of all accounts to the general ledger. Balance sheet https://www.online-accounting.net/ accounts with subsidiary ledgers (sub-ledgers) include accounts receivable, inventory, fixed assets, and accounts payable. Reconcile general ledger accounts to balances of short-term investments with a maturity period of 90 days or less, using brokerage and investment firm statements or financial institutions statements.