Using accounting software will make it much easier to reconcile your balance sheet accounts regularly. There are several steps involved in the account reconciliation process, depending on the accounts that you’re reconciling. That’s why account reconciliation remains a key component of the financial close process. If there are any differences between the accounts and the amounts, these differences need to be explained. Reconciling your bank statements allows you to identify problems before they get out of hand.
- This process is important because it ensures that you can identify any unusual transactions caused by fraud or accounting errors.
- Balance sheets and profit and loss statements are both essential resources for determining the financial health of your business.
- Reconciling your bank statements allows you to identify problems before they get out of hand.
- After an investigation, the credit card is found to have been compromised by a criminal who was able to obtain the company’s information and charge the individual’s credit card.
Investigate discrepancies
After scrutinizing the account, the accountant detects an accounting error that omitted a zero when recording entries. Rectifying the error brings the current revenue to $90 million, which is relatively close to the projection. For example, Company XYZ is an investment fund that acquires at least three to five start-up companies each year. For the current year, the company estimates that annual revenue will be adjusting entry for bad debts expense $100 million, based on its historical account activity. The company’s current revenue is $9 million, which is way too low compared to the company’s projection.
Also, if your business is small and you’re just starting out, reconciling your own accounts can be a valuable learning experience. The frequency of your reconciliation process can be determined by the size and type of business. Whether you’re a small business owner working with multiple sub-ledgers or a multi-million dollar business using an ERP system, reconciling your accounts will always be necessary. Invoice reconciliation also compares two sets of documents for accuracy, but instead of ending balances, you’re comparing invoice details against a hard copy. Account reconciliation is a financial reconciliation, with no real difference, except for how the results of the reconciliation process will be used.
By business model
By reconciling financial records, such as bank statements, invoices, and receipts, businesses can identify discrepancies and irregularities and protect themselves against potential fraud. It is a general practice for businesses to create their balance sheet at the end of the financial year, as it denotes the state of finances for that period. However, you need to record financial transactions throughout the year in the general ledger to be able to put together the balance sheet. Account reconciliation is an important accounting process as the entries in the general ledger may not always be accurate. For instance, when you receive a check from a customer, you may have recorded it as paid.
Documentation Review
When you compare the two, you can look for any discrepancies in cash flow for a certain time frame. Account reconciliation is done to ensure that account balances are correct at the end of an accounting period. The account reconciliation process also helps to identify any outstanding items that need to be taken into consideration in the reconciliation process. The analytics review approach can also reveal fraudulent activity or balance sheet errors.
What makes a good account reconciliation?
By leveraging our Account Reconciliation Software, you can utilize out-of-the-box AI transaction matching rules to automate the reconciliation process and achieve almost 95% journal posting automation. Regular account reconciliation should be combined with invoice reconciliation as part of your internal controls in accounts payable. Though you may not see the process if you’re using accounting software, because this is generally automated, if you enter a debit to an account you will have to enter a corresponding credit for the account to remain in balance. The accountant of company ABC reviews the balance sheet and finds that the bookkeeper entered an extra zero at the end of its accounts payable by accident. The accountant adjusts the accounts payable to $4.8 million, which is the approximate amount of the estimated accounts payable. The documentation review process compares the amount of each transaction with the amount shown as incoming or outgoing in the corresponding account.
Make a note of all transactions on your bank statement for which you don’t have any other evidence, such as a payment receipt or check stub. Finally, without adequate account reconciliation processes in place, both internal and external financial statements will likely be inaccurate. For example, reconciling general ledger accounts can help maintain accuracy and would be considered account reconciliation. While reconciling your bank statement would be considered a financial reconciliation since you’re dealing with bank balances. The objective of doing reconciliations to make sure that the internal cash register agrees with the bank statement.