The integrity of financial data relies heavily on the process of account reconciliation. Imagine accidentally entering an extra zero when recording a transaction. A simple typo of £1,000 instead of £100 could wreak havoc on financial statements. Mistakes in financial data can lead to losses of a financial, reputational, and even legal nature. Financial fraud is another big challenge, with the cumulative value of losses for UK businesses being in the billions of pounds.
This is why account reconciliation is vital. By meticulously comparing financial records with their sources (like bank statements) you can identify and fix any discrepancies, ultimately preventing costly mistakes, fraud, and compliance-related issues.
To keep up with technological advancements in financial management and business practices, it is imperative organisations modernise this crucial process. To fully benefit from modernisation, they must first understand the account reconciliation process and then think about the role technology plays. In this blog we will cover:
- What is reconciliation in accounting?
- The account reconciliation process
- Types of account reconciliation
- How technology can improve account reconciliation
- Improve your account reconciliation process with OneAdvanced
What is reconciliation in accounting?
The meaning of reconciliation in finance is essentially comparing financial records to ensure they match. Account reconciliation involves comparing general ledger accounts for the balance sheet with supporting documents such as bank statements, sub-ledgers, transaction details and other relevant records.
This process aims to ensure the balance is complete, consistent, and accurate. The accountant overseeing this process carefully reviews each entry, cross-referencing it with multiple sources to verify transaction accuracy. If discrepancies are identified, accountants investigate the root causes and make the required entry adjustments to rectify errors or missing transactions.
This activity is performed routinely, typically at month or year-end financial close, to ensure closing statements are a correct representation.
Methods of account reconciliation
There are two common methods of account reconciliation. The first involves a document review, where the accountant examines details in the business's finances and cross-references them with the documents provided by banks or vendors.
The other method is an analytics review. Here, historical data is analysed and compared to current data. Significant deviations between current accounting figures and historical projections can indicate irregularities that require further investigation.
The account reconciliation process
The general ledger is the master source of all financial data. Account reconciliation is usually performed for each balance sheet account in the general ledger. The process may vary depending on the account type, but the following list outlines the common steps performed. Each step requires careful attention to detail.
1. Firstly, the account and reporting period for reconciliation are identified. Then, the beginning balance is compared with the end balance from the prior accounting period to ensure consistency.
2. The next step is to collect all supporting documents. Account ledgers containing debits and credits for the review period provides the transaction details necessary for reconciliation.
3. Upon collection of the required data, the subsequent step is analysis. The accounting team or accountant compares the recorded data in the general ledger or accounting software with the supporting documents to ensure they match. Supporting documents may include independent systems, third-party data, and bank/credit card statements.
4. If any discrepancy arises during the comparison, the accountant must investigate further to identify the underlying reasons. This might involve contacting the bank or vendor to clarify transactions or examining the internal data for errors.
5. After addressing and resolving discrepancies, the accountant implements corrective measures, such as making adjustments to the general ledger, adjusting journal entries, or updating the accounting software.
6. The next crucial step is review and approval of the reconciliation by a supervisor or accounting manager. It involves checking that all balances align, verifying supporting documents for transactions, and confirming that adjustments were made accordingly.
7. The final step is documentation of the reconciliation, noting down all the steps taken during the process. It should essentially provide a summary. A record of all adjustment entries made during the process is typically maintained to ensure a clear audit trail and transparency in financial reporting. The reconciliation spreadsheet should be carried forward from month to month within each yearly accounting period.
Types of account reconciliation
The type of account reconciliation is determined by the context in which it is being used. The two methods discussed earlier can be applied to any of the following reconciliation type:
· General ledger reconciliation
Performed to substantiate the information recorded in the general ledger, this is an essential activity. Here the general ledger records are compared with corresponding financial data as we’ve already touched upon.
· Bank reconciliation
Here the company reconciles its own accounting records with the transactions listed on its bank statement. This process helps identify and rectify errors and timing anomalies. Timing differences could be due to outstanding checks or ACH transactions that are pending clearance, deposits in transit not yet reflected in the company's records, and bank service fees or overdraft fees awaiting recording.
· Accounts payable reconciliation
This process is necessary to ensure the company pays the correct amount to its suppliers. Here, the general ledger balance for accounts payable is compared with supplier statements, verifying all amounts owed are accurate and properly accounted for. Additionally, it includes reconciling credit card statements with the corresponding accounts payable accounts.
· Intercompany reconciliation
Here the transactions and balances between different entities, subsidiaries or divisions within the same parent company are reconciled to ensure accurate financial reporting and understanding the financial relationships between different parts of the organisation.
· Business-specific reconciliations
These involve reconciling accounts within a specific business unit, tailored to its unique needs and operations. This includes stock, inventory, or expenses reconciliation. The goal is to ensure accuracy and compliance with accounting standards by matching various financial accounts, comparing different records, and maintaining consistency across the different systems used within the business.
· Accounts receivable reconciliation
Here the general ledger balance for accounts receivable is matched with invoices and purchase orders. This is important to catch mismatches, which can happen if customer invoices and credits aren't individually entered into the aged accounts receivable journal, or if customer account write-offs aren't recorded against the Allowance for Doubtful Accounts.
· Petty cash reconciliation
The process confirms the cash amount in a petty cash fund matches the transactions logged in the petty cash account.
· Fixed asset reconciliation
This verifies the accuracy of fixed asset values and accumulated depreciation on the balance sheet. It compares the fixed asset register with the general ledger, adjusting the register and confirming depreciation balances match.
· Inventory reconciliation
This type of reconciliation ensures that the inventory records precisely mirror the actual inventory on hand. It involves cross-checking the physical count of inventory items with the recorded count in a company's records to maintain data accuracy.
· Tax reconciliation
Tax reconciliation compares tax liabilities in financial statements and tax returns, ensuring alignment with tax obligations. Through this process, companies identify and resolve problematic recordings to ensure tax compliance and transparent tax reporting.
How technology can improve account reconciliation
The traditional way of account reconciliation typically involves manual data collection, which can be challenging due to the fact data is often spread across multiple departments in silos. Manual data entry and calculations are prone to human error and are more time-consuming too. Manual processes can also increase the risk of fraud going undetected, posing a threat to the entire organisation.
Accountability is another challenge. Without automation in the workflow, it's difficult to ensure policies are adhered to and work is completed in a timely fashion by the appropriate people. In traditional methods, leadership must rely on word of mouth or manual checks to verify policies were properly followed. As the business grows, the number of accounts and transactions increases, exacerbating these challenges. However, with the use of technology, the following positive outcomes can be achieved:
Integrated data sources
Account reconciliation software consolidates data from multiple departments and sources into one central location, breaking data silos. This streamlines the reconciliation process by eliminating manual data collection.
Automation
The automation of repetitive tasks like data entry and bank statement imports is now possible with technology. This automation of finance functions not only reduces the time and resources required but also significantly enhances the reconciliation process by improving efficiency, accuracy, and speed.
Fewer data discrepancies
Automation minimises instances of human error. Software solutions are capable of matching transactions, identifying anomalies, suggesting reconciliation adjustments, and flagging potential discrepancies like duplicate transactions or missing entries. This enables users to resolve issues before they impact financial reporting.
Scalability
The challenge of adapting to increased business growth can be resolved with Cloud-based account reconciliation solutions. These solutions are scalable, allowing businesses to handle
larger volumes of data as they expand. Scalable solutions can accommodate increased transaction volumes, multiple data sources, and complex reconciliation requirements without compromising performance or accuracy.
Greater accountability
Account reconciliation software streamlines the process by automatically tracking and managing assignments, workflows, due dates, and current statuses. Additionally, it maintains a complete audit trail, tracking who prepared, approved, and reviewed each reconciliation, along with timestamps.
It prevents a single individual from both preparing and approving a reconciliation in order to separate duties. This kind of solution provides visibility of all data and progress in real-time, empowering the leadership team to monitor and ensure compliance. These features enhance accountability, transparency, and the overall integrity of the process.
Improve your account reconciliation process with OneAdvanced
Financials is a robust accounting and financial management software. From a flexible general ledger to bank reconciliation, it empowers your finance team to efficiently manage all aspects of accounting. Its general ledger provides real-time balances, which it receives from integrated sub-ledgers. With the bank reconciliation feature, it automatically matches bank transactions with invoices and bill payments, offering an up-to-date cash position across multiple bank accounts.
Financials consolidates many accounting functions into one central location, offering accessible and centralised data. It automates manual tasks, such as populating information from electronic invoices, and generates real-time business insights. This innovative technology saves time, reduces errors, and increases accuracy. As a Cloud-based solution, it can be used by remote workers, while also being secure and scalable.
Say goodbye to juggling spreadsheets and embrace a swift, seamless reconciliation process for efficient financial management with Financials.