Business owners need to trust that their financial records are accurate and complete.
It’s how they’re able to meet reporting requirements, make informed business decisions, and effectively analyze historical performance.
However, whether it’s from human error or machine failure, accounting mistakes do happen. If left unchecked, such errors can create an inaccurate picture of the business’s financial positioning, which could snowball into costly and misguided decisions, reporting mistakes, and compromised relationships with customers or suppliers.
While businesses can mitigate the risk of such errors through proper accounting practices and automated software systems, regular account reconciliations give teams a clear way to validate their accounting records.
What is account reconciliation?
Reconciliation is the practice of verifying internal records for accuracy. It’s commonly used to ensure payment data, transaction records, and account balances are correct.
This process typically involves comparing the company’s internal records, like the general ledger, invoices, and purchase orders, against external records, like bank statements or vendor statements, to look for possible discrepancies or accounting errors.
As we’ll discuss in further detail below, companies regularly reconcile various types of accounts like general ledger accounts, payment processor accounts, and others. In doing so, they can get a real view of their financial standing to support informed decisions and accurate reporting.
What is the purpose of account reconciliation?
Regular account reconciliation provides several key benefits. Possibly the most important reason to complete this process is that it can help business owners improve the accuracy of their financial reporting.
Account reconciliation enables teams to proactively identify errors before they impact financial reporting. Maybe they’ve accidentally miskeyed the value of an invoice in the general ledger, which they only realize once comparing it with their bank statement.
Thus, through the reconciliation process, they can identify and fix this mistake. If gone unnoticed, such errors could lead to misreporting on the income statement and uninformed business decisions.
In a similar way, account reconciliations are a key way businesses can detect and prevent fraud. Not all discrepancies stem from honest mistakes, as illustrated above. Bad actors may intentionally inflate an invoice or send a duplicate, hoping to receive a higher payment than what they’re owed.
Types of accounting reconciliations
To preserve the accuracy and integrity of their financial records, businesses may perform reconciliations for a number of accounts, including:
Bank reconciliation
Bank account reconciliation is a common practice for businesses, helping them verify the amount, frequency, and purpose of all cash inflows and outflows.
To complete this process, the team will compare the bank statement with individual entries in the general ledger.
Accounts receivable reconciliation
The accounts receivable (AR) balance consists of the outstanding invoices that customers still owe the business.
As such, an accounts receivable reconciliation helps businesses ensure the account balance is correct, which they can verify using customer invoices and incoming payment history shown on the business bank statement.
Accounts payable reconciliation
On a similar note, the balance in accounts payable (AP) shows how much the business still owes its vendors and suppliers.
To risk overpaying or, conversely, missing a payment, the team should perform an accounts payable reconciliation. They can reconcile vendor statements with invoices they’ve received and outgoing transaction records from the bank statement.
Inventory reconciliation
Businesses may also reconcile the inventory account to spot any discrepancies or identify potential theft.
This might include a physical inventory count to compare with the balance shown in the inventory account in the general ledger.
Credit card reconciliation
The point of reconciling credit card statements is to ensure all transactions charged to the card were for legitimate business purchases.
Teams may compare the credit card statement with purchase orders, delivery receipts, and bank statements to verify the balance and spot fraudulent transactions.
What are the steps in account reconciliation?
The steps to complete an account reconciliation are relatively straightforward. However, as the business grows, sees increased transaction volumes, and becomes more complex financially, the process can become much more involved.
Here’s a quick overview of the process:
Compile supporting data
The first step is to gather the supporting documentation. This might include:
- Purchase orders
- Bank statements
- Delivery receipts
- Invoices
- Expense reports
- General ledger entries
The documentation required will vary depending on the type of account being reconciled.
For instance, to reconcile credit card accounts, you may only need the statement from the card issuer and the corresponding bank statement for the same period. It may not be necessary to gather purchase orders and invoices to reconcile this account, though they would be useful for AR or AP reconciliations.
Compare records
With the proper records and statements, teams should go through each line item or entry on the account, verifying the date and amount of transactions against the corresponding bank statement, invoice, etc.
Again, the goal is to ensure the accuracy of the company’s accounting records. Hence, this step can take a good amount of time, though it’s one of the clearest ways for teams to uncover possible errors.
If all records match, then the team can assume their data is complete. But, if there’s a discrepancy, they’ll need to do some further digging.
Investigate discrepancies
If there’s a discrepancy in the company’s records, they’ll need to investigate its source and come up with a resolution.
As we’ll discuss in further detail below, this can either be from an honest data entry mistake, payment timing issues, or intentional fraud.
Regardless of the reason, a thorough investigation is needed to determine which values are correct, why the error occurred, and how it can be prevented going forward.
Make necessary adjustments
Accountants may need to make an adjusting journal entry if the discrepancy comes from an internal data entry error.
However, the team may realize the mistake stems from an external source, like if the vendor or credit card company made an error. In this case, they’ll need to reach out to discuss the problem, provide supporting details, and request a revised copy of the statement for audit purposes.
Common causes of discrepancies
To further illustrate why reconciliations are necessary, it’s important to understand how account discrepancies occur.
Whether by accident or on purpose, discrepancies in account balances are almost a guarantee for growing businesses, especially as their team grows, they work with new suppliers and open more accounts. Here’s why they might occur:
Payment timing issues
In some cases, payment processing delays will lead to account discrepancies that are largely out of anyone’s control. Luckily, discrepancies of this kind will take care of themselves with time.
For instance, maybe the team records a payment in the general ledger as soon as the customer sends it. However, it can take a few days for the deposit to reflect in the bank account balance.
Data entry errors
Skilled accountants are still human and can sometimes make mistakes. Maybe they transpose values when creating a journal entry, writing $3,200 instead of $3,020.
Or, they might accidentally omit or duplicate a transaction, impacting the final balance of a certain account at the end of the period.
These types of mistakes are avoidable through proper hiring, employee training, and management. However, teams should still be aware that they can occur, and reconciliations can help uncover them when they do.
Unauthorized transactions
A more dubious reason for account discrepancies is that someone has initiated an unauthorized transaction.
The transaction would not be recorded in the general ledger as an official business purchase. However, it would show up on the credit card or bank statement.
This might stem from an internal employee who abuses their access to the company credit card or an external fraudster who gets their hands on compromised credit card details.
Either way, these fraudulent transactions may only be recognized during the reconciliation process. Further investigation would be necessary to uncover the source of the transaction and resolve the issue.
Best practices to improve the reconciliation process
Businesses can implement the following tips and best practices to streamline this critical workflow.
Set a regular reconciliation schedule
One of the best strategies for effective reconciliations is to complete them on a regular basis.
This is often easier said than done. However, reconciling accounts on a set schedule — like once a month — allows businesses to be more proactive with error and fraud detection, making it easier to resolve potential issues.
If the team procrastinates this task or lets account statements pile up, it can be more cumbersome to work through the backlog, leading the team to rush the process and be less attentive to possible errors.
Segregate duties
If the team has the capacity, it’s a good idea to assign the reconciliation process to someone other than the person in charge of approving payments or updating the general ledger.
Segregating these duties allows teams to get another pair of eyes on account statements and transaction records, preventing certain mistakes from slipping through the cracks.
On the other hand, it also helps mitigate the risk of internal fraud. According to a recent report from the Association of Certified Fraud Examiners (ACFE), more than half of business fraud comes from a lack of internal controls. Segregation of duties directly combats this problem.
Establish clear procedures
Regardless of who is responsible for account reconciliation, there should be clear, detailed procedures for the person to follow.
This will ensure consistency in the process, streamline the workflow, and hopefully make it easier for accountants to complete.
In other words, businesses need to clearly lay out the steps employees should take to reconcile accounts, assign duties and responsibilities, and set specific deadlines for completing the process.
Manual vs. automated accounts reconciliation
Manual accounting practices, like account reconciliations, have been the norm for decades. While this approach can still get the job done, it’s often tedious, time-consuming, and prone to human error.
Instead, businesses increasingly rely on automated solutions to perform various accounting workflows, including reconciling accounts.
Automated software can work much more efficiently on repetitive reconciliation tasks, helping businesses continually verify records without needing to pore over records by hand. It can compare records like invoices, bank statements, and general ledger entries and flag discrepancies for further review.
This way, accounting professionals have more time to spend on meaningful tasks, like financial strategy or cash flow optimization. Plus, they can still have peace of mind that their records are regularly reconciled and checked for accuracy.
Streamline account reconciliation with BILL
Account reconciliations are a critical part of maintaining accurate financial records. However, they aren’t always the most convenient process to manually take care of.
The good news is that there are automated solutions like BILL Spend & Expense that help streamline reconciliations. In turn, your team has more time to focus on more strategic and engaging work.
