Financial statements are probably the most critical documents for a business, as they provide a snapshot of business performance and give an accurate overview of a company’s financial management, profitability, solvency, and liquidity. However, they can only do good when you reconcile the accounts properly.
Few business owners, however, would love to perform the account reconciliation process. And for valid reasons. Reconciliations involve comparing daily transactions with bank statements. If a record is lost, you’re in trouble because fixing it can take time and effort. So, businesses rely on professionals to take care of account reconciliation. Even with modern accounting, as everyone uses software and there’s no need to compare records manually, reconciliation remains one of the most sensitive processes delegated to accountants.
👉 Today, we’ll examine why reconciling is important, what makes it difficult, and outline a secure and efficient way to prepare a 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. Reconciliation report: Why do you need it?
6. What are the main challenges connected with account reconciliation?
7. How to simplify account reconciliation?
What is account reconciliation?
Account reconciliation is a process of comparing financial records with an actual bank balance to ensure the figures are fully balanced. It’s not an easy process, though it’s vital to your business.
Reconciliations of accounts are inevitable for any business. The only difference is in the frequency. Usually, the bigger the company, the more frequently you need to reconcile the books with your bank statement – monthly, weekly, or even daily. Smaller businesses can go with the reconciliation process every month or even every six months.
Usually, you reconcile your books at the end of the accounting period to ensure the general ledger balance is complete and accurate.
Checking account reconciliation requires two pieces of data to match. The first is the business owner’s records (the books), and the second is 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 reconciliations of accounts 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, check out 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 and different regulatory requirements. You might want to know where your money is going, how much you have left, and what to do with it.
Reconciliations of accounts help you verify that your financial records are accurate. If they’re not, you may need to adjust them. This way, you’ll ensure having the most recent and up-to-date information on your company’s financial status.
Moreover, regular bank account reconciliation will minimize the likelihood of receiving fines or penalties that generally could be avoidable.
📌 Note: Before doing an account reconciliation, you need all the necessary documents available and organized.
Difficulties in reconciling accounts
Differences between the records in the books and the actual cash in the bank account are called discrepancies. They happen because of a human error or because the company used the wrong standards to account for their transactions. Whatever the reason, these discrepancies in account reconciliation can cause significant damage to your business if they go undetected.
In the real world, the chance to reconcile accounts flawlessly is pretty small. So, you might want to get prepared to face inconveniences. However, when you know what may cause them, you might try to prevent their occurrence. Here are the most common things that cause account reconciliation differences.
Timing
Sometimes, transactions can be recorded in the general ledger but not cleared by the bank yet or vice versa, leading to disparities between the internal records and the bank statement. The two most common reasons for these discrepancies are the deposit in transit (also known as an unrecorded deposit) and outstanding cheques.
- Deposit in transit (Unrecorded deposit) refers to a situation when an organization made a deposit (and reflected it in the books) while the bank didn’t process or reflect it in the bank statement yet. For example, if a company deposits cash or checks towards the end of a reporting period, it may not appear in the bank statement until the following period. As a result, the internal records will show the deposit and the bank statement won’t, hampering the reconciliation process.
- Outstanding cheques refer to checks issued by the organization and recorded in the internal records but not cleared by the bank yet. So they get deducted from the organization’s account, but as they haven’t been presented to the bank for payment yet, they can’t get processed. It usually occurs when you issue checks near the end of a reporting period, there are delays in the processing, or the recipient presents them late.
Both of them create timing differences between the internal records and the bank statement, leading to reconciliation discrepancies. At this point, you might need to identify and adjust these items in the reconciliation process. This way, you can achieve a more accurate representation of your financial position and ensure the integrity of the financial records.
Omissions
Omissions can occur when transactions get reflected in the bank statement but, for some reason, aren’t recorded in the books. At large, it happens due to either missing receipts or bank fees.
- Missing receipts refer to situations where the business has received payments from customers or clients, but these receipts haven’t been properly recorded. For example, if a customer makes a payment by cash, check, or electronic transfer, and the business fails to document or enter that receipt in its cash book, it’ll result in a discrepancy during reconciliation. These missing receipts can lead to an understatement of the business’s cash position and revenue in the financial records.
- Bank fees are charges levied by financial institutions for various services provided to the business, such as account maintenance, transaction processing, or wire transfers. If you fail to account for these fees, you’ll stumble upon a discrepancy during reconciliation. For instance, if bank fees are deducted by the bank but not recorded in the books, the resulting difference will affect the accuracy of the reconciliation process.
Mistakes
Even with the best accounting systems, mistakes in bank reconciliation will occasionally happen. Mistakes in bank reconciliation often occur due to a human error or insufficient details in the bank statement, which is mostly 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 determine whether there has been a potential error in the accounting process or inside the general ledger. Moreover, it can detect the accounts that need to be reconciled. Here’s an overview of how to do accounts reconciliation to ensure your company’s financial positions stay accurate.
Step #1 of the account reconciliation process: Checking general ledger
Getting accurate records is one of the most important steps that affects your future reconciliations. 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 general ledger accounts to verify that there are no missing transactions and that the balance is right.
Step #2 of the account reconciliation process: Comparing the financial statements
Then, for correct accounts reconciliation, the specialist 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 the books are easily detected and rectified.
Step #3 of the account reconciliation process: Getting rid of balance discrepancies if such appear
Next, a professional studies the acquired information and takes appropriate corrective actions to eliminate any discrepancies in both the 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 so that we’re able to see clearly how a business performs.
Step #4 of the account reconciliation process: 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.
Step #5 of the account reconciliation process: 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 is updated for the reconciliation period.
Reconciliation report: Why do you need it?
A reconciliation report is a document that summarizes the results of the account reconciliation process. It typically includes the following information:
Opening balances
The starting balances of the reconciled accounts, such as the opening balance of the bank account and the adjusted balance in the internal records, serve as the initial positions for comparison and adjustment during the reconciliation process.
By considering the starting balances, businesses can establish a baseline for reconciliation, ensuring that the subsequent steps accurately reflect the financial reality. These balances serve as a foundation for the identification of discrepancies, the resolution of errors, and the ultimate goal of achieving a balanced and accurate financial picture.
Transactions compared
During the reconciliation process, a list or summary of the transactions compared provides a comprehensive overview of the financial activity being analyzed. This list includes essential details such as dates, descriptions, and amounts associated with each transaction.
By including these details in the transaction list or summary, reconciliation becomes more transparent, facilitating the identification of discrepancies, errors, or missing entries. It allows for a comprehensive examination of the financial transactions and aids in the accurate matching and reconciliation of the accounts being analyzed.
Matching transactions
The matching transactions between the bank statement and the internal records are significant indicators of accurate recording and tracking. These transactions represent instances where the information captured in the bank statement aligns precisely with the corresponding entries in the internal records.
Discrepancies
This part of the reconciliation report lists discrepancies or differences between the bank statement and the internal records, which plays a vital role in identifying potential issues that need to be addressed. It encompasses various types of discrepancies that can occur, such as missing transactions, errors, or unrecognized transactions.
By listing and documenting these discrepancies, businesses can initiate the necessary steps to investigate and resolve them. This may involve verifying transaction details, reconciling supporting documents, contacting relevant parties, or making adjustments to the internal records. Addressing these discrepancies ensures the accuracy of the reconciliation process and helps maintain reliable financial information.
Adjustments
During the reconciliation process, it’s common to encounter discrepancies between the internal records and the bank statement. To address these discrepancies, adjustments are made to the internal records in order to bring them in line with the bank statement. These adjustments involve various actions such as corrections, additions, or removal of transactions.
Documenting these adjustments is crucial for audit purposes and maintaining a clear audit trail, as they provide a transparent record of the reconciliation process, demonstrating the steps taken to resolve discrepancies and ensure the accuracy of the financial records.
Closing balance
Closing balance – or the final reconciled balance – is a crucial component that confirms the alignment between the adjusted balance in the internal records and the ending balance reflected in the bank statement. It serves as a critical milestone in the reconciliation process, providing reassurance that all necessary steps have been taken to rectify discrepancies and align the internal records with the bank statement and the reconciliation process has been successfully completed.
Reconciliation comments
Reconciliation comments serve as a valuable tool for providing additional insights, explanations, and documentation related to the reconciliation process, discrepancies, or adjustments made. These comments offer a space to capture important information that may not be evident from the numerical data alone.
As you can see, the reconciliation report serves as a record of the reconciliation activities and provides an overview of the accuracy and integrity of the financial data. It’s crucial for internal control, financial analysis, and auditing purposes.
What are the main challenges connected with account reconciliation?
As more businesses start using the cloud for bookkeeping 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 much more efficiently and reach a wider audience.
However, transitioning into ecommerce also has its challenges. Let’s 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, ecommerce 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 ecommerce 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 ecommerce, 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 simplify account reconciliation?
Reconciling accounts 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 financial professionals use accounting 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 who’s going to look through the statements and reports to make sure everything is smooth.
Connect your bank accounts
If you already use accounting software such as Synder Books, you can easily connect your bank accounts to get a regularly updated, live picture of your current account balance.
This way, you’ve got half of your accounts reconciliation process covered.
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 ecommerce 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.
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.
📌 Note: When reconciling, you can’t create your transactions in the Banking Tab, as they may cause an error. Each transaction will be added only when it’s 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 and stay in full control of your finances. All you have left to do is review the existing matches!
Bottom line
As you can see, reconciliation is critical for a business, as it determines the accuracy of financial statements, which can affect decision-making and hamper or drive business success. While the task is complicated, 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 visit a Weekly Public Demo with the Synder team. You can also sign up for a free trial to test the magic of a simple reconciliation yourself. Don’t hesitate to contact our team for any further information, we’ll be super glad to help.
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