Account reconciliation is a critical process in accounting, which ensures that financial records are accurate and consistent.
This article will provide an in-depth understanding of account reconciliation, its benefits, and how businesses can leverage technology to automate the process.
By incorporating efficient reconciliation in accounting practices, organizations can maintain a solid financial foundation, detect discrepancies, and reduce the risk of financial errors.
What is Account Reconciliation?
Account reconciliation is the process of comparing general ledger accounts (usually from the balance sheet) with supporting documents, such as bank statements, sub-ledgers, invoices, and other underlying transaction details. Reconciliation in accounting is essential for ensuring that the general ledger balance is complete and accurate.
This process is typically carried out by accountants at the end of an accounting period. If the ending balances don’t match, accountants investigate the cause of the discrepancies and make adjusting entries required to resolve differences resulting from errors or missing transactions. By regularly performing account reconciliation, businesses can maintain financial integrity, detect discrepancies, and reduce the risk of financial errors.
How Does Account Reconciliation Work? How to Reconcile Accounts?
Account reconciliation is a process that compares a company’s general ledger (GL) balance with an alternative source of transaction information, such as statements from banks, credit card companies, loan providers, or separate internal systems like fixed assets, accounts receivable, and inventory sub ledgers.
The goal of reconciliation in accounting is to verify the completeness and accuracy of the GL account activity. Any discrepancies are examined, and appropriate corrective actions are taken if necessary.
Once accounting reconciliation is complete, adjustments to the GL account balance may be made through an adjusting journal entry. The effectiveness of account reconciliation as an internal control measure is higher when the data being compared is from a third-party source, like a bank or credit card company. However, reconciling accounts against internal sources, such as sub-ledgers or intercompany accounts, remains beneficial.
In some cases, account reconciliations are performed to comprehend the reasons for legitimate differences between two sources, like variations in investment account reconciliations due to daily market changes. Furthermore, not all reconciling items necessitate adjustments to the balance. For example, timing differences, such as outstanding checks deducted from a payer’s GL cash balance but not yet deposited into the recipient’s bank, can cause the bank balance to appear higher than the GL balance. This difference will persist until the funds are withdrawn from the payer’s account.
Benefits of Account Reconciliation
Account reconciliation is a widely employed financial-close practice that plays a crucial role in maintaining a strong control environment for companies across various industries and sizes. There are several benefits to reconciliation in accounting, such as:
- Verifying GL Account Balances: Account reconciliation helps validate the account balances in the general ledger by comparing them with external documentation. This helps address the discrepancy or identify its causes, enabling financial integrity for the business and increased compliance with regulations.
- Enhancing Accuracy: By detecting errors such as miscalculations, omissions, duplications, and human errors (such as transposed digits during data entry), account reconciliation improves the accuracy of account balances.
- Identifying Fraud and Unusual Activity: Reconciling accounts can reveal potential fraudulent activities and other irregularities, enabling companies to take timely action.
- Preventing Bank Overdrafts: By ensuring balanced GL account balances, account reconciliation provides a more comprehensive and precise view of current funds or positions, helping companies avoid bank overdrafts.
- Discovering Hidden Fees: Reconciling accounts can help identify hidden fees like storage fees, fuel surcharges, service charges, and administrative charges, enabling companies to verify the validity of these fees and potentially save money.
- Detecting Delays and Inconsistencies: Account reconciliation can uncover unexpected or incorrect activities, such as delayed shipments, inaccurate physical counts, or unusual levels of damage in inventory at specific warehouses. This information can help businesses address issues and improve overall operations.
What are the steps involved in accounting reconciliation?
Account reconciliation is a widely adopted practice during the close financial process and plays a crucial role in the control environment across businesses of various sizes and across numerous sectors.
- Comparison with Trial Balance: Begin the process by comparing the trial balance, a report that lists the ending balance of each general ledger account, with the general ledger account. If any discrepancies are identified, make the necessary corrections to ensure accuracy.
- Verification of General Ledger Balances: After the close of a financial period, carefully review each account in the general ledger to verify that the listed balance is complete and accurate, ensuring that all transactions are properly recorded and accounted for.
- Comparison with Independent Systems and Supporting Documentation: Cross-reference the general ledger account balance with data from independent systems, third-party sources, or supporting documentation, such as bank and credit card statements, to confirm the validity of the recorded balances.
- Reconcile with Subsidiary Ledgers: For balance sheet accounts that have subsidiary ledgers (like accounts receivable, inventory, fixed assets, and accounts payable), compare the general ledger account balance with the detailed subsidiary ledger to ensure consistency and accuracy between the two records.
- Investigate Discrepancies: When discrepancies are discovered, thoroughly investigate their source, examining transaction records, entries, and documentation to identify any errors or omissions that need to be addressed.
- Corrective Action: Take appropriate corrective actions based on the identified discrepancies, which may involve making journal entries to rectify balance errors or adjusting entries in the subsidiary ledger or the general ledger to align the balances accurately.
- Re-Comparison: After making necessary adjustments, compare the general ledger and subsidiary ledger balances once again to ensure they are consistent and accurate for the month-end close, confirming the effectiveness of the corrective actions taken.
- Record and Store Information: Document all the information discovered during the reconciliation process, including analyses performed and actions taken, and store this information securely for future reference and audit purposes.
By expanding on the above steps, businesses can gain a better understanding of their account reconciliation process and ensure the accuracy and integrity of their financial information.
What are Common Account Reconciliation Discrepancies?
Common account reconciliation discrepancies can usually be classified into three main categories: timing differences, missing transactions, and transaction errors.
Timing differences occur when a transaction is recorded in the general ledger but not in the supporting data or vice versa. This is often due to a delay in processing or recording the transaction. For instance, an outstanding check that has been deducted from a company’s general ledger cash balance might not yet be reflected in the bank statement, creating a timing difference.
Missing transactions are instances where activity is recorded in either the general ledger or the supporting data but not in both. This could happen if some transactions were inadvertently omitted from one of the records. For example, if several credit card transactions were not included in the general ledger but were present in the credit card processing statement, this would result in a discrepancy due to missing transactions.
Transaction errors refer to mistakes or inaccuracies in recording transactions, which can lead to discrepancies between the general ledger and supporting data. These errors might include duplicate entries in a subsidiary journal or misclassifying an asset as an expense. In some cases, the previous month’s journal entry accruals need to be reversed to avoid discrepancies. For instance, if a company recorded bank fees incorrectly, resulting in a difference between the general ledger cash balance and the bank statement balance, an adjusting journal entry would need to be made to rectify the error.
Automate Account Reconciliation with Nanonets
Nanonets streamline the account reconciliation process by automating various steps, reducing manual effort, and increasing efficiency. By integrating data from multiple financial sources such as ERP systems, bank statements, credit card processors, and merchant services, Nanonets simplifies reconciliation tasks for accounting staff.
Nanonets compares account balances across these different sources and highlights any discrepancies, allowing accountants to focus on analyzing and resolving these variances instead of spending time on manual calculations.
Key features of Nanonets account reconciliation solution include:
- Automated review and approval workflows, ensuring proper segregation of duties and compliance with internal controls.
- Customizable reconciliation templates and checklists that standardize the reconciliation process across the organization.
- Integrated storage of supporting documentation, enabling easy access for review and audit purposes.
- Direct links to applicable policies and procedures, providing a convenient reference for accountants during the reconciliation process.
By utilizing Nanonets for account reconciliation, businesses can optimize their close financial process, improve accuracy, and reduce the risk of errors, ultimately enhancing overall financial reporting and decision-making.
The account reconciliation process is critical to a business’s financial management, ensuring the accuracy and completeness of financial data. By understanding the purpose, steps, and benefits of account reconciliation, as well as recognizing common discrepancies, businesses can strengthen their financial controls and improve decision-making.
Embracing automation with tools like Nanonets can further enhance the account reconciliation process by reducing manual effort, streamlining workflows, and minimizing errors. By investing in efficient and effective reconciliation practices, companies can confidently rely on their financial data and drive better-informed business decisions for sustained growth and success.