Account Reconciliation

Account reconciliation is the process accountants use to confirm the accuracy of the general ledger or other financial documents. In some cases, accountants complete this at the end of an accounting period, such as during year-end tax filings. It is also common for accountants to complete this process before making tax payments.

What Are the Types of Reconciliation?

Business owners and accountants could choose to reconcile any and all accounts that they work with on a regular basis. There are several types of reconciliations.

Bank Reconciliation

Virtually all companies complete bank reconciliations to determine cash position. To accomplish this, the company matches internal records of transactions against bank statements.

Business-Specific Reconciliation

This is a common requirement for companies in the financial sector. They need to frequently reconcile accounts to determine how much they have in client-held funds. Other companies can complete similar reconciliations for specific types of transactions, such as reimbursements.

Customer Reconciliation

This reconciliation compares the A/R ledger with individual payments and invoices. Unlike most other reconciliations, this often includes multiple internal documents.

Intercompany Reconciliation

Larger corporations with subsidiaries complete intercompany reconciliations to ensure records match across the board. This is especially important if internal transactions occur.

Vendor Reconciliation

Accountants reconcile the payable ledger by comparing it with invoices from suppliers. This reduces the risk of underpayment or overpayment.

How Does the Account Reconciliation Process Work?

In the past, accountants completed reconciliations manually. This was a time-consuming process, which involved massive spreadsheets and checking each transaction. Now, cloud computing has paved the way for automated reconciliations.

These are the five main steps accountants follow when they check records manually:

  1. Confirm the opening balances of both documents.
  2. Record any differences in the closing balance.
  3. Note all new data added from the external document used for reconciliation.
  4. Review the closing balance to confirm they now match.
  5. Generate a reconciliation report, if necessary.

What Are Accountants Looking for During Reconciliation in Accounting Process Checks?

When completing reconciliations, accountants are on the lookout for any kind of discrepancy. These are some of the things that may throw off accounts and need to be fixed:

  • Accidental double entries
  • Misplaced commas
  • Misplaced decimal points
  • Missing transactions
  • Missing zeros
  • Wrong credit vs. debit entry

What Are the Benefits of Account Reconciliation?

Based on the errors highlighted above, you likely already have a pretty good idea of why reconciliations are important. Let’s take a look in closer detail:

1. Audit Penalties

It is always best to catch your own errors before an internal or external audit. This is especially the case if the auditor is the IRS or another tax agency. You could find yourself paying back-dated interest, penalties and fees that compound year after year.

2. Cash Flow Management

You can never have proper cash flow management without having an accurate idea of how much money passes through the business. Reconciliation helps you double-check this at various levels, so you have fewer financial surprises and a greater likelihood of meeting financial obligations.

3. Business Relationships

Good money management will also ensure you maintain a good relationship with suppliers, vendors and employees. The last thing you want is to determine you have underpaid anyone. Catching potential fraud early will also preserve business relationships.

What Are High-Risk Accounts?

The benefits are most significant when it comes to high-risk account reconciliations. This involves accounts that have a higher likelihood of generating discrepancies.

These accounts might also have a higher likelihood of creating further risk for the company if not accurate, such as when financial institutions reconcile client funds. A proper account reconciliation risk assessment can determine exactly which accounts are high-risk. These accounts might then require more frequent reconciliations.

The more worried you are about high-risk accounts, the more likely it is that automation can benefit you. By automating your A/R process, you reduce the risk of errors and you’re in a much better position to catch the ones that do occur as early as possible. Find out how Gaviti can help.

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