In any company, reconciliation accounting is a vital part of the work in the accounts department. It implies that a set of regular checks are done to keep the company’s finances as accurate and up-to-date as possible irrespective of the nature of business you are involved in. Here, we define reconciliation precisely and discuss its significance in accounting.
Reconciliation in accounting refers to the process of comparing two sets of data, typically produced internally by the business and provided externally by a bank or other significant third party.
Previously reconciliation accounting procedure was done through using a calculator and several sheets of paper. However, with the popularity of cloud accounting software, a large portion of this process may now be automated. To make reconciliation as simple as possible, you can even acquire software specifically made for bank reconciliation.
How is Reconciliation Accounting performed?
Key components of any account reconciliation are precision and rigorous attention to detail. Both the process’s integrity and the accuracy of its outcomes are guaranteed. Usually, each balance sheet account in the general ledger goes through the following processes.
Account reconciliation involves the following steps when adhering to these standards:
Identify the starting point:
Examining the account’s beginning and ending balances from the previous period to find any differences is the first stage in the reconciliation process.
Collect necessary data:
The further step is to make sure you have all necessary paperwork. The accounts to be reconciled must be determined, as well as the reporting period (month, quarter, or year) to which the reconciliation has to be applied. The account ledgers containing the debits and credits for the reviewed period will supply the transaction information that need to be balanced.
Evaluate the data:
The accounting staff will examine the data after all the paperwork is ready. In most analyses, the general ledger account balance is compared to additional supporting documents such credit card and bank statements, third-party data, or independent systems. Accountants look into any disparities they find and take the necessary corrective action, including making an adjustment journal entry.
Save documents:
All documents must be retained as part of the last phase. The analysis will be examined by a controller or accounting manager. In order to ensure the following, this stage verifies the reconciliation’s details:
- Every balance is in line.
- The transactions are verified with the help of supporting documentation.
- Appropriate modifications were made.
Prior to verifying the accuracy of its financial data and releasing financial statements, a business must finish the reconciliation accounting procedure.
Types of Account Reconciliation
Reconciliation accounting involves locating and resolving disparities in financial transactions and balances by comparing and confirming them. Below are the several kinds of accounting reconciliations:
Bank reconciliation:
To reconcile bank accounts, compare the entries in the cash book or general ledger with those in the company’s bank statement transactions.
Accounts receivable reconciliation:
Verify the correctness of accounts receivable balance by cross-checking them with true documents such as customer invoices and payment receipts.
Accounts payable reconciliation:
To ensure that the accounts payable balance is correct and current, cross-reference it with supplier invoices and payment records.
Intercompany reconciliation:
Reconciling intercompany transactions and balances between subsidiaries or divisions is necessary to guarantee accuracy and avoid errors.
Fixed assets reconciliation:
Analyse purchase invoices, depreciation schedules, and disposal records with fixed asset records to ensure their accuracy.
Tax reconciliation:
Verify the accuracy of tax liability reporting by comparing tax records, such as income tax or sales tax, with other related financial records.
Why Reconciliation Accounting crucial for Businesses?
Reconciliation Accounting is most important process that should be followed for effective bookkeeping. Companies that provide bookkeeping services possess good knowledge and expertise about reconciliation accounting. Let’s know more about why account reconciliation is essential for business.
Accurate financial records:
Reconciliation accounting verifies the accuracy and dependability of financial records by comparing various sets of data. Reconciliation aids in the identification and correction of differences that may arise during the processing or recording of financial transactions by a business. This guarantees that reports and financial statements reflect the company’s financial status fairly and accurately.
Fraud identification:
One of the most important internal control tools for spotting fraud is reconciliation. Businesses can safeguard their assets and financial interests by identifying anomalies or irregularities that may suggest fraudulent transactions by analysing data, such as bank accounts, invoices, and payment receipts. By doing thorough fraud identification your business can be saved from the consequences of HMRC.
Decision-making:
Reconciliation accounting guarantees the completeness and reliability of the data utilised in decision-making. Through the process of reconciling disparate accounts and financial records, organisations are able to make well-informed strategic decisions by gaining confidence in the accuracy of their information.
Regulations and compliance obligations:
Reconciliation accounting aids companies in fulfilling their legal and regulatory requirements. For example, a company can guarantee that it conforms to auditing standards and produces financial statements that meet legal requirements by ensuring correct bank reconciliation. Inadequate account reconciliation may result in fines, non-compliance, or legal repercussions.
Risk management:
Reconciliation accounting assists in the management of financial risks by quickly spotting mistakes, inconsistencies, or abnormalities. Businesses can identify possible risks such disparities in inventory, cash flow problems, and inaccurate tax computations by reconciling their accounts. Early risk identification enables companies to protect their financial stability by taking the necessary measures.
Builds stakeholder trust:
Reconciliation accounting entails the preparation of financial accounts with honesty and openness, which increases credibility and trust among stakeholders including lenders, shareholders, and investors. This trust boosts confidence in the company’s financial stability and enhances its reputation.
What are the most effective methods of Account Reconciliation?
Businesses can maintain regulatory compliance, improve internal control, identify and prevent fraud, and improve the accuracy of financial records by adhering to these accounting reconciliation best practices. Nearly every facet of running and expanding a firm depends on accurate financial reporting, which is facilitated by these procedures.
Best practices for accounting reconciliation in businesses include:
Regular reconciliation:
It is good if you could perform reconciliation accounting once a month or frequently depending on the need of number of transactions. Regular reconciliation enables company to detect disparities and prevent future issues.
For reconciliation procedure it is mandatory that you should have certain bank records like bank statements, receipts, invoices and other necessary information. Proper documented reconciliation procedure makes it easier to find and fix differences which will be beneficial for future audits.
Segregation of Responsibilities:
Segregate reconciliation responsibilities to distinct people. Through this division different sets of eyes will examine the financial data at various stages of the reconciliation process. This will be helpful to avoid mistakes and errors.
Automate reconciliation:
Reconciliation procedures should be automated whenever possible by using accounting software or tools. Increased efficiency, fewer manual errors, and a methodical framework for accounts and record reconciliation are all provided by automation.
Compare and Investigate:
Compare the financial records side by side and note any differences. Look into these differences and find the reasons behind them as soon as possible. Fix any mistakes and make the necessary adjustments to the financial records. Accurate financial information is ensured and recurrent errors are prevented with proper research.
Ongoing communication:
In the process of reconciliation accounting, encourage truthful communication between pertinent departments and people. Information sharing, uncertainty clearing, and problem solving are all facilitated by regular contact. All parties involved must work together and coordinate for a reconciliation process to be thorough and accurate.
Reconciliation review and approval:
In order to guarantee an impartial assessment of reconciled records, establish a review and approval procedure. Examining the suitability and correctness of the reconciled balances as well as looking into any notable disparities should be part of this procedure. The reconciliation process is further assured by approval from an authorised authority.
Continuous improvement:
Regularly assess and improve the reconciliation process by pinpointing areas that need work. Examine patterns of disparities, spot possible weak points, and put the right safeguards in place to avoid mistakes in the future. Businesses may optimise accuracy, efficiency, and total financial control by continuously improving the reconciliation process.
Conclusion:
Reconciliation does not have a time limit. Larger organisations may simply look to do reconciliation once a month or less frequently during hard times; it really depends on your business. Small businesses may reconcile their cash accounts daily. Establishing a routine of daily balancing your accounts, however, will help you monitor your money and identify problems early.
If you are not able to handle reconciliation daily or you are not aware about it. You can take assistance of CoxHinkins accountants in London. They are proficient at handling various reconciliation tasks.
Disclaimer: Kindly note this blog provides general information and should not be considered financial advice. We recommend consulting a qualified financial advisor for personalised guidance. We are not responsible for any actions taken based on this content.
