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Everything You Need to Know About Account Reconciliation

Account reconciliation is the process of comparing financial records or account balances against records obtained from internal or external sources to check if the figures are correct and consistent in the two documents.

Importance of Account Reconciliation

 

Importance of Account Reconciliation

Account reconciliations are necessary and are beneficial for businesses. Regularly reviewing their business transactions can help them set a strong foundation in their small business accounting and ensure the financial stability of their company.

By performing account reconciliations, entrepreneurs and their accountants and bookkeepers can produce:

  • eliminate accounting errors
  • accurate financial statements
  • analyze timing differences with each of their accounts
  • avoid overdrafts from cash accounts
  • reduce fraud risks
  • ensure regulatory compliance

Types of Reconciliation

There are different types of account reconciliations that are necessary for businesses to perform. Here are some of them:

Cash Reconciliation

Cash reconciliation is performed to verify whether the cash balance in the register has the same amount as the actual cash on hand before shift changes or at the closing of the business.

Types of Reconciliation

Balance Sheet Reconciliation

Balance sheet reconciliation is performed to match the records of the closing balances of all the accounts that are part of the business’s balance sheet, such as the assets, liabilities, and owner’s equity accounts. This is generally conducted to ensure the accuracy of the company’s financial statements before the closing of their books at the end of a financial cycle.

 Bank Statement Reconciliation

Bank statement reconciliation is the process of comparing a business’s internal accounting records, typically cash account) with the corresponding information on its bank account statement. Entrepreneurs, along with their accountants and bookkeepers, should reconcile financial records and bank statements regularly to ensure that their enterprise’s cash records, as well as bank records, are correct.

Mismatches on the records are often the result of the following:

  • cheques have been issued but have not been presented or are presented at a later date to the bank;
  • a cheque has been dishonoured by the bank;
  • a banking transaction has not yet been recorded in the company’s books; or,
  • either the company or the bank has made a data entry error.

Credit Card Reconciliation

Credit card reconciliation is quite similar to bank statement reconciliation. It verifies if credit card transactions recorded in the company’s ledger match the information detailed in their credit card statements. Consequently, reconciling credit card receipts with the credit card statements can help the business address any errors, if there are any.

There are two types of credit card statements that businesses should consider to compare with their internal records:

  • credit card account statements, which details the purchases made by their company and employees; and,
  • merchant account statements, which lists the purchase payments made by customers through credit cards.

Vendor Account Reconciliation

Vendor account reconciliation is the process of matching a vendor’s balance in the company’s books of accounts with the balance in the vendor’s books. It must be done regularly to ensure that there are no discrepancies in the invoices issued by the vendor as well as the goods and services a business entity receives from them.

To implement an effective vendor account reconciliation, businesses must:

  • Get a copy of the vendor’s statement of account, which should detail all unpaid invoices, credit notes, and payments.
  • Compare the account statement from the vendor to their entity’s accounts payable sub-ledger.
  • Create an account reconciliation statement, which should show the discrepancies in both records as well as the adjustments made for them.

Customer Account Reconciliation

Similar to vendor account reconciliation, customer account reconciliation is utilized to analyze whether data in the customer’s books match transaction records in the business entity’s general ledger. Customer reconciliation is generally conducted by businesses that offer credit terms to their customers. This is usually a part of account closing activities and is performed before the issuance of monthly financial statements.

Business-Specific Reconciliation

This type of account reconciliation is based on the specific needs of the business. For instance, companies who sell products should perform a cost of goods sold reconciliation to help them ensure that their inventory matches the balances on the cost of goods sold. Entrepreneurs must understand that stock is generally recorded and reported on their enterprise’s balance sheet at its cost.

The cost of goods sold can be calculated in two ways:

  • by subtracting profit from sale (Sale – Profit); and,
  • by subtracting the closing stock from the sum of opening stock and purchases (Opening Stock + Purchases – Closing Stock).

When the amount calculated using the two methods does not match, businesses need to investigate and prepare a reconciliation statement to find the reasons for the mismatch.

Accounting Reconciliation Methods

Aside from understanding the various types of reconciliations, business owners also need to know the two ways of reconciling accounts:

Documentation Review

The documentation review method is the most common way businesses perform account reconciliations. This review process involves manually reviewing existing transaction records with physical documents or receipts of the transaction to ensure that the amount recorded is correct.

Analytics review

In contrast, analytics review is the less commonly used method in reconciling accounts. This review method compares financial records or statements to historical activities to identify irregularities or accounting errors.

How to Efficiently Conduct Account Reconciliations?

As this reconciling process involves comparing accounts and financial data, it is essential to record each business transaction accurately and keep the accounting and bookkeeping records up to date. Many businesses now leverage automation tools to streamline their account reconciliation processes.

Business accounting software programs can enable enterprises to record, categorize, and track their financial records efficiently. These can also efficiently generate balance sheets, financial statements, and other accounting statements. Moreover, an invoice maker app can also help them manage their invoicing processes, enabling them to track their accounts payable and accounts receivables effectively.

In addition, as accounting records and statements are available on the cloud, business entities can quickly review records and documents from various accounts. With this, they can swiftly gather the needed financial data to reconcile their business accounts.

Where to get easy-to-use and time-saving bookkeeping and accounting services?

KIPPIN offers cloud accounting, bookkeeping, and invoicing services tailored to simplify the everyday tasks of businesses. We align our clients to top financial experts on our platform to take care of all your accounting and invoicing needs. We also provide software-only solutions to automate processes, making them quick, easy, and remotely accessible.

Contact us today at 1-905-581-9362 or email us at [email protected]. You may also chat with us from our website and see our product and service lineup to learn more.

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