Financial statements provide a snapshot of a company’s financial health. They provide a broad overview of a business and serve as an indication of its profitability, solvency, and liquidity. However, these indicators are only good when you do account reconciliation 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, I will examine why reconciling is important, what makes it difficult, and outline a secure and efficient way to do it in just two clicks.
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 always an easy process, but it’s vital to your business.
Typically the account reconciliation process takes place at the end of the accounting period to ensure the general ledger account balance is complete and accurate.
Checking account reconciliation 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.
Why do you need account reconciliation?
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 account 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.
What causes differences in account reconciliation process
Differences that are detected when doing account reconciliation are called discrepancies. Account reconciliation definition is 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.
Here are the most common things that may cause account reconciliation differences.
There’s a chance the transactions have been captured in the general ledger but the check has not yet been cleared by the bank or vice versa.
This account 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.
Mistakes usually occur if the account reconciliation process goes wrong. Most often it happens 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. What’s more, it can detect the accounts that need to be reconciled. Here’s an overview on how to do account reconciliation to ensure your company’s financial positions stay accurate.
Account Reconciliation Process Step #1: Checking general ledger
First things first. For an accurate account reconciliation, an accountant needs to go through all the accounts in the general ledger to verify that there are no missing transactions and the balance is right.
Account Reconciliation Process Step #2: Comparing
Then, for correct account 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).
Account Reconciliation Process Step #3: Getting rid of discrepancies if such appear
Next, the accountant studies the acquired information and takes appropriate corrective actions to eliminate any discrepancies.
Account Reconciliation Process Step #4: Prepare the necessary journal entries
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. 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 shoeboxes 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 what makes the account reconciliation process difficult for online businesses.
One could expect that account 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 due to a large number of the sales channels they use. Each and every one of these channels have to be accounted for.
Another challenge connected to 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.
Yet another challenge is that in order to run a proper account 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.
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 will not 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.
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 account 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.
As you see from the statistics above, businesses should use the cloud to increase the efficiency and simplicity of the account reconciliation process.
You may be wondering how you can make account reconciliation more efficient. Here are some concrete steps you can take.
1. Connect your bank accounts
If you already use accounting software such as Synder Accounting, 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 account reconciliation process covered.
2. Connect sales channel and payment gateway(s)
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.
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.
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 Accounting, 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 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!
As you can see, it’s possible to establish a simple, straightforward two-click routine for an accurate account reconciliation process. 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. Try Synder for free (no credit card required) to test the magic of a simple reconciliation for yourself.