If you follow us on social media you may have seen us speak about account reconciliation, but what does this actually mean? We have put together a quick guide to help explain this critical process that allows businesses to keep accurate financial records.
Account reconciliation involves checking two sets of financial records against each other to ensure that the figures match. It often involves the comparison of internal financial records against external financial records (such as those supplied by a bank). If the figures don’t match each other, then that is when you have a problem and action needs to be taken! It is worth checking the reason for the mismatch though, are any invoices outstanding, or are there bank feeds that have been paid but are still processing?
The process of account reconciliation gives businesses the opportunity to notify the bank of any errors, and have them corrected. This is crucial to ensure the financial health of a business, and also ensures the financial records accurately represent the business.
Types of Account Reconciliation
Account reconciliation varies depending on the specific needs of the business. Two of the most common types are: balance sheet reconciliation, and general ledger reconciliation. Let’s have a look at both of these in more detail.
- Balance sheet reconciliation
This type of reconciliation is what we touched on, the comparison of internal accounts with corresponding external documents. It is a bit broader than just comparing it with a bank statement though. Balance sheet reconciliation can cover anything from cash and investments to shareholders’ equity… basically any accounts that can be found on the balance sheet. This type of reconciliation should take place every month and includes bank, loan and credit card statements.
- General ledger reconciliation
This type of reconciliation focuses on the internal review of accounts, and is the process of reviewing the general ledger to confirm all entries and balances are correct (including accounts receivable and accounts payable). General ledger reconciliation helps businesses keep accurate financial records and quickly identify any discrepancies. This allows them to know exactly who owes them money, and which bills are outstanding and need to be paid. An essential part of ensuring a healthy cash flow within a business.
The Process of Account Reconciliation
Many businesses use software to download their monthly bank transactions, but reconciliation is still an important process to carry out. Here is a quick guide on what you need to do:
- Obtain the records – through your internal ledger or your bank statements
- Compare the balances – do the figures on the internal and external documents match?
- Identify any discrepancies – look for any outstanding payments or errors
- Make adjustments – once discrepancies have been identified, make adjustments to your accounts that are needed.
Account reconciliation is usually carried out by accountants, or finance professionals within the business – bookkeepers, finance officers etc. In smaller businesses, this may fall down to the business owner, but it is always worth getting an accountant to check this over at year-end.
Best Practices of Account Reconciliation
To ensure you are carrying out account reconciliation correctly, here are some best practices for you to follow:
- Reconcile regularly – don’t wait until the end of a quarter, or worse still, the end of the year. By carrying out reconciliation on a regular basis, you will be able to catch any reconciliations quickly and therefore maintain accurate records.
- Use technology – there are so many software tools out there now (including Sage), which can help automate and streamline the reconciliation process. This also helps to eliminate human error too.
- Involve other departments – reconciliation is more than just a function carried out within the accounting department, it should involve all stakeholders within the business.
By systematically reconciling accounts, businesses are able to carry out decisions based on up-to-date financial information. This is such an important factor to keep businesses running smoothly, so we hope this guide has given you an insight into how to reconcile your accounts on a regular basis. If you would like more information on how Sage cloud accounting software can help make this process faster and easier, get in touch with the team at Reality Solutions today.
*This article contains general information in order to assist all of our customers and is meant for guidance only – there are no guarantees that the information we provide will be suitable for your particular needs. If you require specific assistance, we recommend that you seek professional guidance on your individual circumstances. Reality Solutions are in no way responsible for any loss or damage arising from any information contained within our articles.
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