What is account reconciliation, its types, and best practices
Every business should know what is account reconciliation, as it is a very important process that could impact multiple areas of your business. At its core, account reconciliation is a simple concept. It aims to maintain accuracy for your accounting and financial records by comparing your general ledger account with other documents.
One of the most prominent types of reconciliation is bank reconciliation, which helps with your cash flow management, but other forms of reconciliation are also important for your business.
You may have already compared your general ledger accounts with your bank statements to ensure that your bank balance matches your transactions. This process is called account reconciliation.
Reconciling your accounts doesn’t just happen against your bank statements. You can also reconcile general ledger accounts with sub-ledgers, other statements, and balances. Accountants will have to investigate further if your balances don’t match during this process.
In general, the account reconciliation process begins with comparing your general ledger balance with another document that holds details of your transactions. This could include bank statements, credit card statements, sub-ledgers, expense reports, invoices, and others.
The goal is to ensure that all the entries in your general ledger are accurate and complete. If there are any discrepancies, they will then need to be investigated and resolved.
While you reconcile your accounts, you may need to adjust your journal entries or create new ones. This will help you in matching your balances, especially when the source of a discrepancy is a data entry error or timing difference.
Account reconciliation is often associated with the end of the financial year when you close your accounts. However, most businesses also will and should reconcile accounts every month, allowing for better control and visibility of their finances.
Alternatively, you can also use an automated account reconciliation platform that allows you to do the process in real-time.
Account reconciliation is often associated with what is bank account reconciliation, but there are actually many types of reconciliation. Different types of reconciliation require different documents and look at different parts of your business processes.
Most businesses will do a mix of several different types to ensure that they have the most accurate records.
As the name suggests, bank account reconciliation involves checking your bank balance and statements. The general idea is to compare the cash balances on your general ledger account with each of your business bank accounts.
Amongst the many types of reconciliation, this one helps you deal with errors and timing differences related to your bank accounts.
You might also be interested to read: 7 best business bank account in India
Accounts payable reconciliation is done to match the amount you owe to vendors with your financial records. You want to take into consideration accrual accounting when recording accounts payable.
If you have an invoice issued in one particular month that needs to be paid in the next month, for example, you’ll want to be sure you know that.
Performing accounts receivable reconciliation on a monthly basis allows you to make sure that customer payments have been received accordingly and accurately.
However, if your aged accounts receivable journal follows accrual accounting, then credit and customer invoices may not match your general ledger. Regardless, you want no recording errors that may cause discrepancies.
Read our article on accounts payable vs receivable, to know the detailed comparison of how AP and AR are different and what is its impact on business cash flow.
Put simply, inventory reconciliation involves recording physical inventory and comparing it with your accounting records. It ensures that all your inventory is accounted for and recorded correctly.
You should also perform inventory reconciliation to match your inventory valuation. However, there may be discrepancies that cannot be resolved, which must be recorded using journal entries.
Suggested read: Inventory turnover ratio - What is it and how to calculate?
Like every other type of account reconciliation, payroll reconciliation compares two documents to verify that your employee salaries are accurate.
This would typically mean that you will need to compare your general ledger account with your payroll ledger or register. You may also need to check other documents to ensure that all your payroll information is correct.
Put simply, credit card reconciliation involves comparing your credit card or payment facilitator records against another source.
This could be against a bank source that accepts the cash or against internal records made on an expense management or e-commerce platform. Often you may need to perform three-way matching to reconcile credit cards.
Your business will have physical assets to keep the business running. These assets need to be reconciled and rolled forward to ensure purchases, sales, disposals, and depreciation are accounted for correctly.
Your fixed assets will have a debit balance and depreciation will be accounted for as a credit balance.
Expense reconciliation refers to the process of matching the entries on your general ledger with your expense reports. You can also use receipts, invoices, and other documents to compare your general ledger.
The goal of expense reconciliation is to ensure that your entries are accurate to the actual expenses.
Related read: How to reconcile expense reports?
While accounts payable reconciliation focuses on comparing your general ledger with the amount you owe, vendor reconciliation compares your accounts with receipts or statements from your vendors.
You’ll want to request statements from vendors confirming that the amount you paid on an invoice matches the amount they received. This prevents conflict between you and your vendors.
Knowing what is bank account reconciliation is essential for any business, especially considering its importance. Achieving better accuracy on your records will undoubtedly affect other aspects of your business positively.
Above all, account reconciliation is done to improve the accuracy of your financial records.
Making sure that you reconcile your accounts regularly will help you maintain accurate accounting records, which has an impact on many other business processes. You want good financial integrity to allow you to do other processes smoothly.
The unfortunate truth is that even with all the fraud prevention measures you have, sometimes attempts may still slip through the cracks. You want to resolve them as soon as possible. This is where account reconciliation comes in handy.
Reconciling your balances every month allows you to check for fraudulent transactions and take action on them.
Many regulations will require you to perform regular bank account reconciliations. This ensures that all your financial reporting is accurate and up to the standards. Without reconciliation, you also run into the risk of fraudulent transactions, which could cause compliance issues.
Making sure that you reconcile your bank accounts and sub-ledgers guarantees that you know exactly what your finances look like, which will in turn ensure its legality.
Your accounts and financial reports are often the data basis for decisions for future plans, including budgeting and forecasting.
This is why accuracy is important, as double-checking your accounts and ensuring that they are accurate will result in better budgeting and forecasting. The best way to achieve this level of accuracy is to reconcile your accounts regularly.
Guaranteeing that you have accurate information by regularly performing account reconciliation will help you manage your cash flow better. You can quickly identify any errors and discrepancies, meaning that you will also be able to resolve them faster.
If you realize you are owed outstanding payments, for example, you’ll be able to get paid as soon as possible. As a result, your cash flow will be positively affected.
The auditing process is often tedious. Even preparing for it requires you to double-check all your documents before the process begins. Tackling audit findings and trying to resolve them can also take a lot of time.
Performing regular account reconciliations not only helps you prepare for audits but also allows you to resolve problems in advance.
Often reconciliation helps you identify whether certain expenses are necessary or not. For example, reconciling expenses that are paid in advance will allow you to determine whether you want to continue that expense relative to the goods or services you receive.
Knowing this information is valuable to your decision-making and aids in strategizing.
Your business is bound to have many stakeholder relationships, both external and internal. Developing better communication with each stakeholder can be done by reconciling your accounts.
You’ll be able to provide investors with an accurate report and confidently communicate with employees where your business is at. It improves stakeholders’ confidence in your business when you have good accuracy.
Performing account reconciliation to ensure that your vendor payments and customer payments are all accurate allows you to nip problems in the bud before they grow into big issues.
Ultimately, this will promote better understanding between you and your vendors or customers. Being able to communicate any discrepancies helps with developing stronger relationships.
Regular account reconciliations will also provide you with a better understanding of your accounts.
From ensuring that all your statements are accurate to identifying all your monthly transactions, you will be able to get more useful insights for your business. You can use your accounting records as the basis for your data analysis.
The first step to performing your account reconciliation is to make sure you have all the data that you’ll need. This includes sourcing bank statements (from each bank account you have), financial statements, and other transaction records.
Depending on what type of reconciliation you’re doing, you could also need to gather invoices, receipts, expense reports, and more.
For the sake of internal control, it’s better that during the reconciliation process, the documents that you are matching your general ledger with are sourced from a third party. In this case, a bank or credit card statement will fulfill that requirement.
After you have all your data sources ready, you’ll want to begin identifying discrepancies. To do this, compare the ending balance of your general ledger account with the ending balance of your second source of data. Make sure that the date for both balances is the same.
Even if there are no differences in the balance, it’s still recommended that you proceed with reconciling your activities to check for errors made by offsetting other errors.
You should match each transaction to see if there are any discrepancies. If there are any, make sure you list these and investigate them further.
While you may have several different data sources as a result of gathering necessary documents, it’s advised that you complete your bank reconciliation first. It’s also important that you do this monthly to ensure that your general ledger is accurate.
There are several ways to do with. With accounting software, you can automatically do bank account reconciliations. You can also do the process manually with a reconciliation form.
Either way, make sure that you perform reconciliation with all your bank accounts. This means that you will have to reconcile your general ledger with each monthly bank statement you have.
The results of your automatic bank account reconciliation or manual reconciliation form will let you know if there are any errors or discrepancies. You will need to carefully review the entries that contain or create discrepancies. Then, determine whether or not you need to correct them with new journal entries.
For example, you may find that on your bank statement, your bank has automatically charged bank fees. This would not have been previously recorded as a journal entry. You’ll need to make a new adjusting entry for the bank fees to resolve the discrepancy.
While bank account reconciliations are undoubtedly crucial, you also must do other types of reconciliation to ensure that all the financial data you have is accurate.
This could be accounts payable reconciliation, accounts receivable reconciliation, fixed asset reconciliation, and many more. If you use accounting software, your software should already do this automatically.
If you do your accounting manually, however, this is a necessary step to ensure that all your sub-ledger balances match your general ledger balance.
You can do this by comparing your sub-ledgers with your general ledger and going through each transaction. Any missed transactions should be recorded using a journal entry.
If you have a lot of transactions to process each month, this step is necessary for your business as it will give you better clarity and insights into your balances and activities. You want to review a comparative trial balance against your current balance.
Your trial balance can tell you a lot of your business activities. For example, you’ll be able to tell what the average spending is on employee expenses per month during the current fiscal year. This helps you put the current month’s spending into perspective.
After you compare your current balance with your trial balance, it’s a good idea to update the trial balance to have it reflect your newest set of data.
Make sure that you have all the correct and completed journal entries and include recurring and reversing entries for your current balance.
Then, update your trial balance. Check for its accuracy once again, as you don’t want an inaccurate trial balance for the following months to come. Once you have an accurate trial balance, that signifies that your account reconciliation process has been completed.
One of the most common examples of account reconciliation is reconciling the cash balance in your ledger and bank account. During the process, you may find that the balances do not match due to discrepancies such as missed entries or bounced payments.
One account reconciliation example is accounts payable reconciliation, which is a key process for businesses to help maintain a smooth operation process. Reconciling your accounts payable is necessary as it will reconcile any discrepancies caused by early payment discounts, late fees, disputes, and other factors.
Similar to accounts payable, accounts receivable reconciliation is equally important as it ensures that all your customer payments are made correctly. By doing this, you can maintain a better cash flow and develop good relationships with your customers. This also lets you stop credit to defaulting customers.
Sometimes companies will pay for expenses in advance and have goods or services delivered to them over a period of time after that payment. It’s necessary that you reconcile your accounts to ensure that the goods or services promised were delivered to you correctly.
Companies may also allow customers to accrue their due amounts as liabilities. They can pay for the goods or services they purchased at a later date. You’ll want to reconcile your accounts to factor those in and see if you need to reevaluate those arrangements.
Many enterprise businesses will have subsidiaries or group companies. While a parent company may make a deposit to a subsidiary, inter-company transactions such as these still need to be accounted for separately, as each subsidiary is its own legal entity.
You will have business assets such as property and machinery, which can be sold or depreciated over time. You could also buy new assets. Reconciling your assets ensures that you have accurate transactions and the true value reflected on your balances.
You may have made investments in different projects for taxation purposes. These investments that your business makes will also need to be reconciled. This ensures that you record the true value of the investments accurately and that they are reflected in your books.
While reconciliation is undoubtedly important for any business, it’s no secret that the process can be complex and tedious. Here are some common challenges that you may encounter during the reconciliation process.
You may find that there are discrepancies between your accounts when you perform reconciliation. While the goal of account reconciliation is to resolve these discrepancies, it can be difficult to do.
Some transactions on your general ledger may not appear the same on your bank statements or sub-ledgers. You will be required to find out why there are unmatched transactions, which can be caused by several factors.
Doing your data entry manually can lead to human-made errors such as typos, misplaced decimals, or even missing zeroes. This can lead to your general ledger accounts not matching your bank statements and balances.
Bigger businesses will have large transaction volumes to reconcile. This is very time-consuming to do if your account reconciliation process is manual. Each transaction could take several minutes, making hundreds of complex transactions difficult to finish.
It’s possible that there are discrepancies between your balances because of timing differences. For example, your credit card statements may be cut off at a later date compared to your general ledger.
It’s not just bank account reconciliations that you have to do. With many different sub-ledgers to reconcile, you’ll be dealing with multiple data sources. You may also have multiple bank accounts.
There are cases where there is very minimal error during your accounting processes, but there are still discrepancies caused by bank errors. Resolving these fully can take a bit of time.
There are multiple pieces involved in the account reconciliation process. It’s important that you document all the discrepancies you encounter and adjust or create new journal entries to address them.
Reconciliation requires multiple accounting team members. Sometimes they may also collaborate with employees from other departments. Communication gaps in the process can slow it down and cause even more errors.
Often reconciliation requires a lot of manpower to be able to get it done in a timely manner. This can be difficult when you don’t have enough staff and plenty of other tasks.
Regular account reconciliation is necessary to ensure that you comply with local regulations. With traditional reconciliation processes, however, it can be a hassle to go through each transaction at the end of every month.
Relying on manual processes to reconcile your accounts takes a long time. The lack of automation will not only result in long delays but also likely more errors, which could lead to compliance issues.
If you haven’t optimized your file storage, you may end up losing or misplacing documents that are necessary for audits. When you perform account reconciliations manually, it’s especially difficult to get a complete audit trail.
Despite the challenges of account reconciliation, it’s still very important to do it regularly. Bank statement reconciliations, especially, are necessary for businesses to do. Failing to do so can lead to fatal business risks.
The best way to check whether your financial data is accurate or not is by regularly reconciling your bank statements.
Without implementing reconciliation as part of your business processes, you won’t be able to pinpoint inaccuracies, which could result in bad financial reporting.
It’s not just typos or missed entries that you can pinpoint by reconciling your bank statements.
One of the risks that you run into by not performing regular reconciliations is that you won’t be able to detect fraud attempts and unauthorized transactions.
Reconciling your bank statements brings attention to your balances, allowing you to accurately check how much money you have.
You can run into cash flow issues and think that you have money you actually don’t if you fail to reconcile your accounts.
Many banks provide overdraft facilities, but they come with a fee, which means you want to try to avoid it if you can. However, this is difficult to do without account reconciliation.
Leaving your accounts unchecked could lead to accidentally using the overdraft facilities or even penalties.
Without reconciling your bank statements, discrepancies that have not been resolved will carry over.
As a result, your tax reports will be inaccurate. The last thing you want is for tax officers to find issues with your tax filing, which could land you in legal trouble.
Not reconciling your accounts once a month can lead to your end-of-year balances being skewed with plenty of discrepancies.
This will cause longer and more complicated audits with findings that are much more difficult to resolve when they could have been dealt with sooner.
Often reconciling your bank statements will help you in identifying transaction patterns from the previous month.
Failing to perform account reconciliation regularly will mean that you won’t review your transactions, which can result in missing opportunities that you were not early enough to act on.
Many organizations have an internal control policy, which often will have a particular officer or team check and review business finances and transactions.
However, without account reconciliation, you will have weak internal controls. You won’t know the quality of your internal control unless you reconcile accounts.
Although there are many challenges that you may encounter during the reconciliation process, there are also tools and technologies available that can help you streamline account reconciliation. Many of these tools promote automation to increase efficiency.
One of the most useful tools to help you streamline account reconciliation is an automated accounting system. Many businesses have begun to use accounting software to make the entire financial closing process much easier.
For example, modern accounting software allows you to set up easily customizable rules that will automatically match your transactions with invoices, which makes accounts payable reconciliation hassle-free.
Get automatic imports of your bank transactions each week. You can also integrate your accounting software with other tools like expense management platforms, allowing you to import your expenses straight into your ledger.
This eliminates the need for manual data entry and reduces errors during the reconciliation process.
Spreadsheets are considered helpful tools by many businesses across multiple processes. Account reconciliation is no different, as businesses still often use spreadsheets to present and summarize accounting information.
However, spreadsheets are beginning to go out of fashion as people are starting to realize how inefficient manual data entry is. They also don’t often offer much analytics and require users to perform their own in-depth analysis.
However, there are other data analysis tools that you can use to help you conduct reconciliations. These tools can aid in automatic data collection and validation.
With all the data ready, you will also be able to get more in-depth analysis based on your account reconciliations.
There are also software providers that have tools specifically designed for the reconciliation process. You can access standardized reconciliation templates, customizable approval and review workflows, and automated transaction matching with reconciliation software.
Make reconciling your bank accounts, credit cards, accounts payable, accounts receivable, and other documents automatic and much easier. Data matching features will save time and free your employees from tedious manual checking.
With reconciliation software, you can even automatically roll unmatched transactions forward for further action. The automated review process will ensure that there are no errors during reconciliation.
Don’t leave your reconciliation until the end of your business financial year. Instead, establish a regular schedule and do your account reconciliation on a monthly basis.
This allows you to identify any discrepancies in a timely manner and resolve them while the matter is still recent. You will also end up with better-informed decisions due to getting higher visibility in real-time.
While it can be helpful to get multiple people on the job when you’re doing something as tedious as reconciliation, unclear segregation of duties can also lead to tasks being muddled. This could result in more errors.
When you are directing your team to perform regular reconciliations, make sure that you segregate duties and let your employees know of each person’s responsibilities.
It’s no secret that performing account reconciliation can be time-consuming, especially when done manually. Not to mention the amount of data entry errors you could run into. You want to use accounting software or data-matching tools to streamline the process.
Performing two or even three-way sync can be done in just a few clicks. Get better and faster results by automating your reconciliation.
Account reconciliation is only as effective as its quality assurance is. Before you begin the process, make sure that the data that you have is from the right source. It’s best that you have the most accurate accounting data and bank statements you can possibly find to make reconciliation easier. After your accounts have been reconciled, you also want to validate your data again.
Considering how important transparency is during the account reconciliation process, there needs to be clear communication between your employees when reconciling your accounts.
Having regularly scheduled meetings during the month-end reconciliations, for example, can ensure that everyone is on the same page.
Implement communication tools to help with this. This way, you can keep all communications in one place and notify all personnel of discrepancies.
The last thing you want is to lose your records after meticulously undergoing the reconciliation process. Make sure that you have an established policy about how documents should be stored and retained.
While you may not want to retain each document forever, be clear about how long each document should be kept. This way, you’ll be sure to have all the documents that are still relevant.
Doing your accounting data entry manually can increase the risk of human-made errors. This will cause more discrepancies during the account reconciliation process. An accounting automation platform can solve this problem and lead to smoother reconciliation.
You also won’t run into the risk of misreading your records when reconciling your accounts.
One of the other biggest benefits of using accounting automation software for your account reconciliation is that you will be able to save a lot of time.
Instead of having to manually go through each transaction and ledger entry, you can automatically sync your accounts and allow your software to notify you of any discrepancies.
Saving time by automating your reconciliation will ultimately increase your overall efficiency. You will be freeing up your employees’ time and energy to allow them to do other tasks that need attention.
As a result, you will be able to get more accounting tasks done with minimal staff on your team.
You don’t need to wait until the end of the month to perform account reconciliation and ensure that all your records and balances are accurate. With an automated accounting system, you’ll be able to perform automatic reconciliation in real-time. Get direct sync and matching between your accounts for better accuracy and visibility.
Contrary to popular belief, having a third party in the form of an accounting software provider help you with your account reconciliation does not increase data breach risks. In fact, you’ll have better data security.
These software providers are experts in what they do and will be able to guarantee industry-standard certification and security measures.
Performing account reconciliation manually may be easier and less time-consuming when your business is still in the early stages. You won’t have as many entries in your ledger and your end-of-month or year-end balances are often still manageable.
However, using accounting automation software allows you to scale your business easily without worrying about reconciliation.
You won’t have to worry about where to store all your documents when you have an automated accounting system.
The results of your reconciliation processes can be updated and logged on your software, meaning that it’s easy to adjust and create new journal entries. Your audit trail is easily accessible whenever you need it.
Each company will have its own set of rules and policies when it comes to reconciliation.
Using accounting automation software allows you to take your policies into consideration and customize the rules and workflows on your software while still smoothly automating your processes. Automation should make your existing workflows easier instead of forcing you to change them.
With the amount of data you have stored in the form of accounting records, it would be a waste to not do anything with them.
Use accounting automation software to get better data analytics and insights, which can help you decide on future actions. Doing comparisons is also much easier when you can access historical data.
Increase employee satisfaction and motivation by freeing up your employees from having to do tedious and repetitive tasks.
The team will be much happier when they have time to do more productive work rather than repeatedly do manual data entry. Introducing automation tools to your accounting staff will open up doors to more creativity and flexibility.
Requiring less time to perform your reconciliation means that you will also need fewer dedicated employees for it.
Overall, this can help you reduce labor and training costs, as the reconciliation process won’t be as intensive. Not to mention that fewer errors during the process will also lead to lower costs.
The modern account reconciliation automation software market is rapidly growing. With many companies moving toward using automated models for their business processes, it’s no surprise that reconciliation is one of the processes that businesses are looking to automate—especially when considering how long and tedious it can be when done manually.
Account reconciliation automation is projected to grow rapidly between 2023 and 2030, with many new cutting-edge technologies improving and increasing in popularity in the market.
As the world moves toward more environmentally conscious models, it’s no surprise that there will also be an increased focus on sustainability and environmental consciousness in the account reconciliation sphere.
This will see businesses continue to shift to using the help of automation software, which will reduce the need for paper documents and excessive physical storage systems.
In addition to this, there is an increasing need to automate reconciliations because of the pandemic. It has caused businesses to implement remote and hybrid work models. This means that employees are often not in the same physical location.
Due to the need for remote collaboration tools, the demand for account reconciliation software also grows. Businesses look for tools and technologies that can help them automate and collaborate from anywhere.
As an all-in-one expense management solution for businesses, choosing Volopay as your finance management partner will help you simplify your account reconciliation. From automatic expense updates to accounting integrations, Volopay is equipped with numerous tools that are impactful for your business’ reconciliation process.
Automate your transaction and accounts payable records to avoid wasting your time performing manual data entry. You’ll also eliminate the risk of human errors, increasing your accuracy and making the account reconciliation process easier.
Volopay also grants you the ability to customize and automate a multi-level approval workflow. With this, all of your transactions will be routed to approvers automatically. Managers, department heads, and even C-level management will have to review and approve transactions before they are made.
All information is checked and validated in real-time. In this regard, real-time reconciliation will automatically happen for your business.
By offering accounting integrations, Volopay simplifies the entire accounting process for you, which includes account reconciliation. There’s no need to manually import your transaction to your accounting software. You can choose to either directly sync your expense data or use Universal CSV, which will only take a few clicks.
You can guarantee all your ledger entries reflect the exact same expense data from your Volopay platform. To top it off, you can set up automatic two or three-way matching to reconcile your records easily.
All your expenses, starting from corporate cards to payroll, are simplified with Volopay. Streamline the process from end to end—from requesting the payment to reconciling your transactions.