Anastasia SuFinancial statements provide a snapshot of a company’s financial health. They give a broad overview of a business and serve as an indication of its intercompany financial management, profitability, solvency, and liquidity. However, these indicators are only good when you reconcile the accounts properly.
The account reconciliation process is an integral part of business, which helps to connect accounting with bank statements, records with cash, and protect the business from any discrepancies.
Yet not many business owners dare to undertake a bank account reconciliation on their own. There are legitimate reasons why they feel this way. Before the dawn of account reconciliation software solutions, reconciling in general meant comparing multitudes of daily transactions with bank statements. Completing the account reconciliation process manually and in one sitting has always been next to impossible, as paper records are easily lost and often difficult to replace.
👉 In today’s article, we’ll examine why reconciling is important, what makes it difficult, and outline a secure and efficient way to prepare the business for flawless reconciliation.
Contents:
1. What is account reconciliation?
2. Why do you need account reconciliations?
3. Difficulties in reconciling accounts
4. How to do account reconciliation
5. What are the main challenges connected to account reconciliation?
6. How to do account reconciliation easily
What is account reconciliation?
Account reconciliation is a major accounting process that compares financial records with an actual bank balance to ensure the figures are fully balanced. It’s not an easy process, but it’s vital to your business.
The reconciliation process is inevitable for any business. The only difference is in the frequency. Usually, the bigger the company, the more frequently you’ll need to reconcile the cash book with your bank statement – monthly, weekly, or even daily. With smaller businesses it’s vica versa: the reconciliation process can be done every six months.
However, the account reconciliation process usually takes place at the end of the accounting period to ensure the general ledger account balance is complete and accurate.
Checking account reconciliations generally requires two pieces of data to match. The first one is provided by the records a business owner has (cash book) and the second one is made by the third party such as a bank (bank statement). If you match up these two reports, you should see zero difference between the two documents — it means they have the same value on a specific date.
📌 Note: The account reconciliation process must be completed before a company certifies the integrity of its financial information and issues financial statements.
To fully understand the whole accounting process inside one’s business it’s important to have an understanding of Accounts Receivable – check our article on the AR basics to get a thorough understanding of the topic .
Why do you need account reconciliations?
The account reconciliation process keeps your business on track with its finances, as well as with different regulatory requirements. You need to know where your money is going, how much you have left, and what you need to do with it.
It’s important to do accounts reconciliation because it helps you verify that your financial records are accurate. If they’re not, you may need to adjust them. This way, you’ll have the most recent and up-to-date information on your company’s financial status.
What’s more, regular bank account reconciliation will minimize the likelihood of receiving fines or penalties that generally could be avoidable.
📌 Note: Before doing an account reconciliation, make sure all the necessary documents are available and organized.
Difficulties in reconciling accounts
Differences that are detected when reconciling the accounts are called discrepancies. Account reconciliation definition is as follows – a process of making sure all the transactions have been accounted for. This could happen because of a human error or because the company used a wrong set of standards to account for their transactions. Whatever the reason, these discrepancies in account reconciliation can cause serious damage to your business if they go undetected.
In the real world, the chance to reconcile accounts perfectly is really small, so it’s better to be prepared for any inconveniences that may occur. Here are the most common things that may cause account reconciliation differences.
Timing differences
Once you’ve identified a difference between two accounts and spotted where it is, you can then begin looking for why that has happened. There’s a chance the transactions have been captured in the general ledger but the check hasn’t yet been cleared by the bank or vice versa. The most common of them are:
- Deposit in transit (or Unrecorded deposit);
- Outstanding cheques.
Omissions
A failure to reconcile properly means there could be omissions in the bank reconciliation statement, which have serious implications for your accounting records. This accounts reconciliation discrepancy is related to the transactions that appear on the bank statement but haven’t yet been recorded by the business in the cash book. The most common of them are:
- Missing receipts;
- Bank fees.
Mistakes
Even with the best accounting systems, mistakes in bank reconciliation will happen occasionally. Mistakes in bank reconciliation often happen due to a human error or insufficient details in the bank statement. Most often they happen because the activities have been recorded improperly.
📌 Note: If an error has been detected, it has to be noted in the account reconciliation and recorded in an adjusting journal entry.
How to do account reconciliation
There are many reasons why the account reconciliation process is important. First and foremost, it can help to determine whether there has been a potential error in the accounting process and/or inside the general ledger. What’s more, it can detect the accounts that need to be reconciled. Here’s an overview on how to do accounts reconciliation to ensure your company’s financial positions stay accurate.
Account Reconciliation Process Step #1: Checking general ledger
Getting accurate accounting and records is one of the most important tasks for any business owner or accountant. Neglecting this essential step leaves your company’s finances open to manipulation and potential fraud. Even the smallest businesses need a system that reduces accounting errors and simplifies bookkeeping procedures.
So first things first. For an accurate account reconciliation, an accountant needs to go through all the the general ledger accounts to verify that there are no missing transactions and the balance is right.
Account Reconciliation Process Step #2: Comparing the financial statements
Then, for correct accounts reconciliation, the accountant has to compare the balance in the general ledger with the data from independent third-party systems or other supporting documentation (bank or credit card statements). This can be a bank statement and balance sheet reconciliation.
Reconciliation between the bank statement and the general ledger allows both statements to complement each other. Errors and omissions in accounting are easily detected and rectified.
Account Reconciliation Process Step #3: Getting rid of balance discrepancies if such appear
Next, the accountant studies the acquired information and takes appropriate corrective actions to eliminate any discrepancies in both general ledger and bank statement.
Reconciliation tasks include balance checking, identifying duplicate entries, and correcting mistakes where necessary. These routines may feel like a lot of work, but they help keep the accounts neat and tidy so that we’re able to see clearly how a business performs.
Account Reconciliation Process Step #4: Prepare the necessary journal entries
It’s time to double check your ledger and all the discrepancies that were noted. If discrepancies have been detected in the previous step of account reconciliation, balance errors should be corrected and marked in special journal entries.
Account Reconciliation Process Step #5: Post the journal entries
And that’s it! Now the journal entries are ready to be posted. When a discrepancy between the two accounts is found — for example, because an amount was entered in one ledger but not in another or because both books show different values for a single transaction — a “secondary entry” has to be posted to correct it. Only by posting all necessary secondary entries can you achieve accurate reconciliation. After this step the general ledger will be updated for the reconciliation period.
What are the main challenges connected to account reconciliation?
As more businesses start to utilize the cloud for their accounting and sales in general, many issues of the past are disappearing. You no longer need to keep shoe boxes full of paper receipts to track your business expenses. New possibilities allow businesses to sell their products more easily and reach a wider audience.
However, transitioning into e-commerce also has its challenges. Let’s take a look at why it’s so difficult for online businesses to reconcile their accounts.
Multiple channels
One could expect that accounts reconciliation will soon cease to be an issue, but there are certain challenges that arise with the growth of revenue. For instance, e-commerce businesses may struggle with accounting processes due to a large number of the sales channels they use. Each and every one of these channels have to be accounted for.
Platform fees
Another challenge connected with the e-commerce account reconciliation process is that each sales platform usually charges a service fee.
At the end of an accounting period, you need to account for those fees paid to payment providers. Otherwise, your revenue will be off by a large amount. Such a discrepancy will affect everything from business planning and inventory orders to major things like estimating the amount of taxes you owe.
Transaction data
Yet another challenge in accounting reconciliation is that in order to run a proper accounts reconciliation, you need data. If you have questions about the validity of a certain transaction, you need to have easy access to the info not only about the customer (or vendor), but also about the items (or products) sold.
The issue here is that even if your data is brought in automatically, without a good solution much of it may be lost on the way, leaving you with bare numbers. Identifying the source or some characteristics of a transaction in question may become impossible in such cases.
Refunds
Another reason why your bank balance might not correspond to your accounting records is that refunds might not have been properly accounted for. Unfortunately, refunds are quite frequent in e-commerce, and it’s reasonably important to record them accurately.
For correct account reconciliation it’s crucial to record not only each sale and refund but also all the fees commanded or reimbursed by the payment platforms once a refund has been issued.
Keep in mind that most vendors won’t waive a fee on the original transaction. Some will also charge you an extra fee for issuing a refund. All these activities need to be properly recorded in your books.
Double checks
Many business experts come to the conclusion that manual bank account reconciliation can be very expensive for business owners.
According to the survey, up to 59% of financial department resources can be spent on managing transactions. Shockingly, up to 95% of this energy is spent on transactions that already match. This is explained by the fact that the manual accounts reconciliation process is slow in identifying transactions that actually require special attention.
That’s why producing accurate financial statements and maintaining well-run income statements and journal entries become unreasonably expensive.
How to do account reconciliation easily?
Account reconciliation can be done manually, but it uses up a lot of time and requires specialized knowledge. Furthermore, if you make any mistakes in reconciling, there’s no way to undo your work. That’s why many accountants use account reconciliation software to avoid such complications.
We’ll use Synder Sync as an example of accounting software that ensures flawless reconciliation. Don’t forget that even with a proper software solution, it’s better to consult a professional accountant who’s going to look through the statements and reports to make sure everything is smooth.
Note: Create a free account with no commitment and no credit card required to see how you can automate transaction management in the most convenient way. For a detailed consultation, you can contact our specialists who’ll walk you through the onboarding process and answer any questions you may have about the features and the workflow in general.
1. Connect your bank accounts
If you already use accounting software such as Synder Books, you can easily connect your bank accounts in order to get a regularly updated, live picture of your current account balance.
This way you’ve got half of your accounts reconciliation process covered.
2. Connect sales channel, payment gateway(s) and accounting software
Most accounting software solutions don’t have detailed native integrations with all of the payment platforms you might be using. Synder provides you with such an option and helps you cover the other half of account reconciliation. Use Synder to connect your payment platforms, such as Stripe, Square, Shopify Payments, or PayPal, among others, with your accounting software.
📌 Note: Learn how to connect a sales channel, payment platform and accounting software via Synder in just a few clicks.
Once your bank accounts and payment and e-commerce platforms are connected to your accounting software, your bank balance will be regularly updated. Individual transactions and payouts will also be regularly synchronized with your accounting in the background.
3. Reconcile
When all the platforms you use are connected to your accounting software, the account reconciliation process becomes as smooth as possible. For example, if you use Synder Books, all you need to do is categorize your transactions (or you can use the Smart Rules feature for expenses and deposits) and then check your reports.
Try a 7-day free trial for Synder Books to manage the transactions in the most convenient way or book a Demo with Synder specialists who’ll walk you through the onboarding process and answer any questions you may have about the features and the workflow in general.
📌 Note: When reconciling, you can’t create your own transactions in the Banking Tab, as they may cause an error. Each transaction will be added only when it has been approved by the bank.
That’s it! When you connect your bank accounts and payment gateways to your accounting software, you make sure you bring accurate data into the account reconciliation process. You stay in full control over your finances. All you have left to do is review the existing matches!
Bottom Line
As you can see, it’s possible to establish a simple, straightforward two-click routine for an accurate account reconciliation process within the accounting software. Just try it to see for yourself!
If you have any further questions, you’re always welcome to contact the Synder support team using the in-app chat or other ways of contacting us provided in the footer of this page. Test the magic of a simple reconciliation for yourself.
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