A bank reconciliation statement is important because it helps identify any discrepancies between the bank statement balance and the company’s book balance. It also helps ensure that all transactions have been recorded accurately. Account reconciliation is necessary for asset, liability, and equity accounts since their balances are carried forward every year. During reconciliation, you should compare the transactions recorded in an internal record-keeping account against an external monthly statement from sources such as banks and credit card companies. The balances between the two records must agree with each other, and any discrepancies should be explained in the account reconciliation statement. Take note that you may need to keep an eye out for transactions that may not match immediately between the sets of records for which you may need to make adjustments due to timing differences.
Deposits and Checks
- Reconciling your bank statement can help you avoid bounced checks (or failing to make electronic payments) to partners and suppliers.
- This process requires you to compare internal records at the beginning and end of a financial cycle.
- Should there be any discrepancies that come up through the reconciliation process, you can then take action to resolve them.
- Customer reconciliations are performed by businesses which offer credit terms to their customers.
Businesses are generally advised to reconcile their accounts at least monthly, but they can do so as often as they wish. Businesses that follow a risk-based approach to reconciliation will reconcile certain accounts more frequently than others, based on their greater likelihood of error. In these instances, a reconciliation report needs to be produced, which quantifies and explains the reasons for the closing balance between the two data sources. Producing this report makes it easier to perform the next reconciliation, as these differences explain why there is a discrepancy between the opening balances purpose of corporate bylaws of the two different documents.
What is the reconciliation process?
The key role that reconciliation plays in making sure your numbers are right means that anyone who works with financials needs to master the reconciliation process. Before we get into the account reconciliation process, let’s back up and think about the who, what, and when of the reconciliation workflow. This is the one that keeps business owners and finance and accounting professionals up at night. While some fraudsters exhibit a true evil genius in covering their tracks, most thieves aren’t that clever. Careful attention to accountant for freelancers details and review of reconciliations by someone who doesn’t work with that account can help catch many instances of fraud. Parent companies use this to bring together all the accounts and ledgers from the subsidiaries they may have.
How to Do Account Reconciliation
Doing that work manually is tedious and time-consuming to say the least, and it’s easy to make mistakes. Adding to the challenge, some transactions may be split on one side but not the other. When the process has worked well, it will have picked up on any inaccuracies or instances of fraud. There are 5 main recognised kinds of reconciliation accounting that are industry-wide.
Some or all of these will happen at some point in the life of every business. But if you don’t reconcile your accounts regularly, you might not catch mistakes as they arise. The month-end process refers to certain double-entry accounting steps. This typically involves the entry of a transaction into the general ledger in 2 separate places.
Prior to founding FloQast, he managed the accounting team at Cornerstone OnDemand, a SaaS company in Los Angeles. Instead of spending days each month reconciling accounts, FloQast AutoRec can do that in minutes. AutoRec leverages AI to reconcile transactions, what is the net book value of a noncurrent asset whether those are one-to-one, one-to-many, or many-to-many. Unlike other reconciliation systems, AutoRec doesn’t require users to create or maintain rules. Plus, you can set accuracy thresholds to determine whether transactions need to match to the penny, or if being off by say 5% is close enough. Next, match the entries in the general ledger with transactions on the statement.
Other reconciliations turn non-GAAP measures, such as earnings before interest, taxes, depreciation, and amortization (EBITDA), into their GAAP-approved counterparts. High growth businesses which burn large amounts of cash or those with little cash left in the bank should perform bank reconciliations weekly. These requirements may be put on them by their investors and shareholders. Alternatively, businesses with a field sales team will have to reconcile the value of employee expenses payable with the individual balances of submitted expense reports. There is more likely to be difference when reconciling if part of the expenses process is performed manually. Vendor reconciliations compare the balance owed on supplier provided statements to transactions within the payable ledger and its overall balance.
