What is Account Reconciliations: How it Works

Businesses function best when finances are in proper order. Regardless of the size of your organisation, you’re likely to be conducting account reconciliations on a consistent basis. This important process can be made easy with the aid of automation solutions. Here, we’ll cover everything there is to know about account reconciliations, the process of reconciliation, and the type of tools you need to expedite and automate the timely process.

Coming Up

1. What is Reconciliation?

2. What is Account Reconciliation?

3. What are the Types of Reconciliations?

4. Why Reconcile Accounts?

5. What is the Reconciliation Process?

6. What Creates Reconciliation Discrepancies?

7. What is Balance Sheet Reconciliations?

8. Advantages of Balance Sheet Reconciliations

9. What is General Ledger Reconciliations?

10. Account Reconciliation Best Practices

11. What are the Benefits of Reconciliation Tools?

12. What are the Best Reconciliation Tools?

13. What is Reconciliation and Automation?

14. Final Words

What is Reconciliation?

Reconciliation is a type of accounting process that compares different sets of records to make sure that they are properly recorded and in agreement.

By comparing two sets of data, business owners and accounting departments can ensure that financial movement and account balances are being properly recorded and transacted. Typically, it’s performed by comparing two sets of records– one internal and another external (i.e. bank statements or supplier or customer documents).

In the past, reconciliation was only performed manually through the use of Excel spreadsheets. Now, businesses can reap the advantages of automation solutions like SolveXia, which can perform account reconciliations and save you time.

What is Account Reconciliation?

Account reconciliation is the accounting process of comparing two sets of financial records. In most cases, accountants perform account reconciliations at the end of accounting periods. This helps to make sure that general ledger account balances are accurately reflected.

Account reconciliation can be performed in different ways since there is no one standard way to do so. However, most organisations will rely on double-entry accounting given that it’s required under the generally accepted accounting principles (GAAP).

While there are different types of account reconciliations, it’s common to compare the general ledger to other third-party systems or statements. While account reconciliation is useful for your business to know where it stands financially, which, in turn, will affect important decisions, it also can impact your organisation’s risk. This is especially true for publicly traded companies, which must share their internal control mechanisms with their annual reports (as part of the Sarbanes-Oxley Act).

If you fail to complete account reconciliations in a timely manner, then you can incur the risk of having misstated accounts and making financial decisions that could be detrimental to your business.

While it is possible and somewhat common to have discrepancies within your accounts, some will be easily explainable and others will require some investigation. No matter the reason for discrepancies, the main purpose of account reconciliation is to rectify these differences so that you can move forward with confidence in your account balances.

What are the Types of Reconciliations?

There are different types of reconciliations that can be performed on a personal or business basis. The good news is that you can automate any type of reconciliation.

Let’s review what they are:

Bank Reconciliation

The most common of all reconciliations is the bank reconciliation. Bank reconciliation is the process whereby businesses check their cash position by comparing the value of bank transactions internally with the statement from the bank.

Vendor Reconciliation

Vendor reconciliations review supplier-provided statements and the balance owed with the payable ledger and overall balance internally. In order to conduct vendor reconciliation, you’ll have to request vendor statements as they aren’t automatically sent (like bank statements are).

Intercompany Reconciliation

When a company exists under an umbrella of companies, then intercompany reconciliations are performed so that the parent company has accurate accounts. A debt in one company should match the credit in another if there’s any amount owed/owned

Customer Reconciliation

If you provide credit terms to customers, then customer reconciliation checks that the accounts receivable ledger is in sync with the receivables control account in the general ledger.

‍Business Specific Reconciliation

There are other more specific reconciliations based on business types. For example, a company may have to reconcile their inventory value on the balance sheet by manually counting stock of goods held. Or, for businesses in the financial services sector, there’s the need for frequent reconciliations of accounts of client held funds.

Why Reconcile Accounts?

The reconciliation process is important for an array of reasons.

‍Most of these reasons have to do with financial implications and the protection of your organisation. At the same time, reconciling accounts will help you to better understand your company’s financial position at any point in time.

Overdrafts

When transactions are still pending on your bank statement, the balance reflected in your account may be different from reality. Performing bank reconciliations can help to avoid overdrafts from cash accounts.

Accuracy

By maintaining different sets of financial records that are in accordance with one another, you can rest assured that balances are accurate.

Regulations

To adhere to government regulations, balance sheets must be right. Completing reconciliations consistently and in a timely manner will help to ensure that your financial statements don’t have errors. Reporting the wrong balances can be a costly mistake, both financially and for your reputation.

Risk

By conducting account reconciliations, you will not only reduce compliance risk, but you will also quel or prevent risks associated with fraudulent activities. If you notice something is off sooner rather than later, you can protect your business’ financial assets before real and irreversible damage occurs.

What is the Reconciliation Process?

Before getting into the step-by-step process of how account reconciliations work, it’s good to know that there are two main methods. These include:

• Analytics review: Analytics review is a less popular way to perform reconciliations, but it is used to quickly spot inconsistencies in accounts. By utilising historical data and estimated balances of where you’d think the accounts should be, business leaders may be able to notice mistakes or fraudulent activity.

• ‍Documentation review: While analytics review can work, the most common way to carry out reconciliations is by documentation review. This is also where automation software will shine. With documentation review, you use current data to compare records and reconcile the accounts.

Whether you perform reconciliations with automation or manually, the steps go as follows:

1. Comparison: Start by compiling the data sets that you plan to compare. For example, this could be your bank statement and internal ledger. If anything on your bank statement and ledger are mismatched, make a note of it. Or, if you’re utilising software like SolveXia, you will be notified.

2. Check Outgoing Funds: Outgoing funds are reported on your bank statement. These include checks, charges, and ATM transactions. If you have these types of outgoing funds on your bank statement, make sure you see their matching amount on your ledger.

3. Checking Incoming Funds: Similarly, if you’ve deposited money into accounts, the bank statement may not yet reflect the deposits. However, you will see that outgoing fund on your internal ledger. It’s also important to note that if you are earning interest in your bank account, you’ll need to add that to your internal books, too.  

4. Look for Bank Errors: It’s uncommon but possible for bank errors to occur. If you realize there’s something on your bank statement that shouldn’t be there, such as a wrong amount for a transaction or extra free, contact your bank immediately to fix the issue.

5. Validate Records: Reconciliation is complete once the two data sets’ records match and you’ve rectified any errors. When you make any changes to the documents, keep a record of these updates. With automation software, this will be taken care of naturally as all data entries and edits are stored within the system, making it easy to pull an audit or reconciliation report, if the need for one should arise.

What Creates Reconciliation Discrepancies?

If you come across account balances that don’t match, there’s not always a need to panic. Most differences can be chalked up to one of the four following reasons:

1. Mistakes

Mistakes happen. It could be the case that a transaction hit the wrong account or was manually entered incorrectly so there’s a typo in the amount. It could also have been a mistake on behalf of the bank. Reconciling accounts often will enable you to catch these mistakes.

2. Missing data

Transactions may fall through the cracks, so the missing data is the reason for the error. Accounting software and automation tools like SolveXia prevent the chance of this happening.

3. Timing differences

Transactions, such as checks, may hit your bank statement a few days after you make a deposit. These timing differences between money leaving accounts and being added to others can be delayed, which can cause mismatching balances.

4. Fraud

The most daunting reason for account differences may be attributed to fraud. By performing reconciliations regularly, you’ll be able to spot fraud and thievery early on, which makes it easier to rectify and stop from becoming an even bigger issue.

What is Balance Sheet Reconciliations?

Balance sheet reconciliation is the reconciliation that happens when you are closing accounts. These accounts include:

• Cash
• Accounts payable
• Accounts receivable
• Payroll liabilities
• Accrued liabilities
• Loans and debt
• Prepaid expenses
• Inventory

Balance sheet reconciliation should happen in defined intervals, such as monthly, quarterly, or annually. In some businesses, balance sheet reconciliation may happen as frequently as every day. Obviously, automating this process is a surefire way to execute reconciliations on a daily or even weekly basis because it will be a time-consuming process otherwise.

Advantages of Balance Sheet Reconciliations

For regulatory reasons, compliance issues, and adequate business functioning, balance sheet reconciliations prove to be crucial for a business’ success.

Without performing balance sheet reconciliations, it’s very easy and likely that you will misinterpret your business’ cash position. This could result in business decisions that are not feasible or too risky given your current financial standing. Balance sheet reconciliations also offer insight and transparency into a business’ inner workings and where money is being spent.

Along with understanding your expenses better, you will also be able to gain a better understanding of where you are making your money. Knowing these important facts will help you to better allocate resources, cut costs, and expand into new avenues when opportunities present themselves.

What is General Ledger Reconciliations?

The general ledger, or a company’s books, should also be reconciled regularly.

What is GL Reconciliation

General ledger reconciliation is the process of checking that every transaction is properly recorded twice in the general ledger, once as a debit and once as a credit, in the respective accounts.

What is the Process of General Ledger Reconciliation

The process of general ledger can vary by organisation, but whatever it is, it should be clearly defined and outlined in a policy. Following standard guidelines, the process incorporates the following:

• Policy: To perform any general ledger reconciliation properly, the person responsible must know the company’s policy. This will cover the accounting principles, too.
  

• Data: Once you have gathered all necessary data, it’s time to review the documentation. If transactions have mistakes, then you must pinpoint the reasoning and fix the problem.
  

• Cross-check: After updating any records, you’ll want to perform a final cross-check to make sure that everything is in alignment.
  

• Documentation: With reconciliation being regulated, it’s imperative to keep documentation of anything you’ve done and all actions that were taken. Along with storing this information, the report will also serve as a roadmap for how to perform the GL reconciliation the next time.

• ‍Approval: A controller, bookkeeper, or other responsible party will have performed the GL reconciliation. Upon completion, it’s common to go through a round of approval and sign-off to double check the work. This is an important step since a company is only clear to release financial statements once GL reconciliation has been performed.

Benefits of General Ledger Reconciliation and Automation

By using automation software, you will save valuable time and make the GL reconciliation process run seamlessly. The software is able to pull all data from the necessary systems and compare the data side-by-side. All matching records will be auto-certified. Should there be any discrepancy, you’ll be alerted. GL software will automate the workflow, safely store all data, store all policies for quick reference, provide audit trails, and even present your team with templates to standardise the process simply.

Account Reconciliation Best Practices

It’s possible to conduct financial processes with some level of variance. However, there are generally best practices to follow as guidelines, which will help to standardise and execute processes such as account reconciliation.

Consider following these suggestions to manage your account reconciliation process:

• Documentation: Account reconciliation will happen over and over again. For this reason, it’s important to execute the process in the same way each time. To accomplish this, clearly define and outline the process and document it for reference. With automation software, you can design the workflow within the system so that anyone with access will be able to carry it out by clicking a few buttons.
  

• Error Correction: For the times when you find errors, you’ll want every team member to know how to proceed. You can do this by documenting error correction and having a plan in place.

• Internal Controls: You’ll want to maintain adequate internal control that will leave you with the peace of mind in knowing that all transactions were approved and accurately transpired.
  

What are the Benefits of Reconciliation Tools?

As you know, account reconciliation, bank statement reconciliation, general ledger reconciliation, and all other types of reconciliation can become time-consuming. These highly important processes require that all data is correct from the start. Every responsible party on your team must be up-to-date with your organisation’s practices and workflows.

‍Automation tools like SolveXia will transform how your business conducts any type of reconciliation process. The benefits are expansive and include:

Streamlined Workflows

The process of account reconciliation is repetitive and may require multiple people to be involved. With automation, you can let the system carry out the work and take care of the heavy lifting like data collection and comparison. Along with streamlining the process, automation solutions make it so that you’ll never suffer from key person dependencies. If your go-to employee who conducts reconciliations is out of office, anyone else will be able to pick up wherever they left off and ensure that reconciliation is performed in a timely manner.

Error Reduction

Along with death and taxes, it’s certain that humans make mistakes. The data and amount of transactions that must be compared within the reconciliation process requires utmost attention to detail. Automation inherently reduces the risk of human errors.

Fraud Reduction

Although reconciling accounts won’t stop fraud if it already happened, it will surely help you be able to spot it quickly. This way, you can take action to prevent extensive damage from occurring.

Increased Employee Satisfaction

Automation reduces the amount of manual and monotonous work that your team has to perform. Instead, they can focus on high-level, analytical, and creative tasks instead, which can lead to increased employee satisfaction (a.k.a less turnover).

Standardisation

With automation software, you will know that your processes are running the same way every time. No matter who or where your team works, the software will store the process, data, and workflow such that standardisation is easily achievable.

Internal Controls

Lastly, you will always maintain control over the process. You gain transparency to see exactly where any reconciliation process stands and what occurred. This type of internal control and boosted transparency can result in saved time because you won’t have to spend time having meetings and constantly checking in with your team to learn about what’s going on.

What are the Best Reconciliation Tools?

When choosing the right account reconciliation tool for your team, you can begin by selecting the must-have features.

Useful Software Features

We’ve compiled a list of some of the best reconciliation automation tools in the market, along with the features you should look for, including:

Reporting

The software system can produce reconciliation reports which offer an overview of what records match and the ones that don’t. It should also be able to compare financial reports from the past.

Transaction Matching

The heart of the reconciliation software is the ability to collect and compare records. The tool should be able to pull data from various and disparate sources. You can input the type of matching rules and thresholds you’re willing to accept based on your organisation’s reconciliation policies.

Classification

During the matching process, the tool can classify and attribute type classes to records.

Issue Management

Should an issue arise, the tool should know what to do next. Either the issue is to be rolled forward into the next accounting period for rectification at a later time, or it can remedy the issue on hand.

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5 Software Solutions to Consider

1. SolveXia:

SolveXia is an analytical automation software that’s been especially designed for finance teams. You will reap a significant boost in productivity by utilising its software. The enterprise-grade solution can pull data from any source in seconds, ingest data in various formats, and perform complex data matching.

Running on the cloud, all information is accessible from anywhere and at any time. In less than 30 minutes, you can deploy the software to be up and running at maximum capacity with no coding required. Book a free demo to see how your finance team will be positively transformed.

2. Blackline:

Blackline can store massive amounts of data in different formats to help your business adhere to reconciliation regulations. The tool provides accounting automation, reconciliation automation, and financial close process management.

3. Bank Rec:

Bank Rec’s software can be purchased entirely upfront or via monthly subscription to include five users and carry out your reconciliation processes. It’s able to resolve matches, identify matches, and roll forward unmatched records.

4. Xero:

Xero’s online accounting software provides a real-time look at your cash flow. With features like bank reconciliation, tracking inventory, and paying bills, it is useful for mid to large-sized businesses.

5. ReconArt:

ReconArt is another web-based solution that provides bank reconciliation, financial close automation, accounts reconciliation, journal entry, variance analysis, credit card reconciliation, and intercompany reconciliation. It is designed solely to handle reconciliations.

On the other hand, SolveXia offers reconciliation automation and so many more opportunities to utilise reconciliation in other parts of your business, including process automation, reporting automation, and more.

What is Reconciliation and Automation?

Reconciliation automation is the use of software to automatically execute account reconciliations.

Why is Reconciliation Automation Important?

As opposed to conducting reconciliation manually, this software leverages both robotic process automation and artificial intelligence to collect and match records in seconds.

By automating the necessary process of reconciliation, you can alleviate your team of the manual burden of being bogged down in financial records. Instead, they can spend their time on high value-add tasks. Additionally, reconciliation automation will allow you to increase your reconciliation frequency and maintain accurate data.

How Automating Reconciliations Can Help?

Automating reconciliations will allow you to save time, save money, optimise the process, and streamline workflows. With the increased confidence in your financial data, you will be informed and have useful information in real-time which will translate into making better business decisions.

Manual reconciliations are plagued by a lack of accountability, miscommunication, lost time, and missed opportunities. Automating reconciliations makes the process smooth, transparent, and fast.

Final Words

Your finance team has a lot on their plate. Account reconciliations are one of the most important financial processes, but they often get overlooked because performing them manually is too time-consuming and overwhelming.

Luckily, you can ensure that your account reconciliations process is performed accurately and rapidly by standardising the process and utilising automation solutions like SolveXia.

If you’re ready to see the power of SolveXia in action, request a demo!