Accounting Reconciliation Process and Best Practice Tips

The wise adage goes, “Measure twice, cut once.” While this sounds like contracting advice, the accounting reconciliation process follows suit and in its own way goes by, “Check twice, pay once.”

Account reconciliation is a much needed process for any business, but it's time-consuming and repetitive nature makes it an undesirable manual process. Financial reconciliation software alleviates the burden, saves time, and reduces errors.

Keep reading to learn all you need to know about account reconciliation best practices.

Coming Up

What is Reconciliation?

What are the Benefits of Reconciliation?

What are the Best Practices of Reconciliation?

What are the Types of Reconciliation?

What are the Steps in Reconciliation?

What Causes Reconciliation Discrepancies?

What are the Benefits of Reconciliation Software?

Wrap Up

What is Reconciliation?

Reconciliation is the process of finding and resolving errors. In business, accounting teams are tasked with comparing the company’s internal ledgers with its external documents, such as bank statements in a bank reconciliation, to ensure that the two sets of records are in alignment.

When records do not match up in terms of their data, reconciliation takes place in which investigation is performed.

After the reason is found, the accountant or team can make the necessary adjustment to equate the datasets and end up with matching balances across the relevant documentation.

What are the Benefits of Reconciliation?

While many would agree that reconciliation isn’t their favorite part of their day, month, or quarter, they would all agree that it’s useful and of great value.

This is because reconciliation is a process that makes sure your company’s financials are in order, which is naturally a must-have if you wish to survive, adhere to regulations, and make informed decisions on an ongoing basis.

The accounting reconciliation process provides businesses with:

1. An Accurate Financial View

Account reconciliation relies on data from various systems and makes it possible to keep track of a company’s financial health. While it can take a lot of time to perform manually, it can be expedited with the aid of finance automation software to streamline the process.

With finance automation tools, business leaders and stakeholders can trust their data and statements to be able to make better and up-to-date business decisions.

They also gain knowledge of the business’ cash flow in real-time, since there may be understandable delays from actions performed between statements.

2. Reduced Risk of Fraud

While a finance automation solution cannot completely avert fraud, it can be a useful practice to help reduce the risk and catch it early if it occurs.

Whether the fraud happens purposely because of a rogue employee or customer, account reconciliation will allow your team to spot it early on and take necessary action right away.

3. Trustworthy Decision Making Capabilities

Since every business decision has a financial implication, it’s critical to understand the business’ financial health and standing.

The account reconciliation process enables this by reviewing records on a timely basis. This is especially important as transaction volume grows and businesses scale.

What are the Best Practices of Reconciliation?

The accounting reconciliation process looks different for every business and comes with its own list of pain points. That being said, there are several tried and true best practices that can work in your favor to improve and enhance the overall process.

During your next reconciliation process, whichever kind it may be, keep in mind the following tips:

1. Leverage Automation

Reconcilation automation software is perhaps the most important best practice to consider if you’re not already using it.

Automation tools streamline the entire process and remove the need for tedious manual work. With a library of workflow templates built-in, accounting teams can deploy no-code solutions in less than 30 minutes and speed up their workflows instantly.

As the tool connects data systems, performs transaction matching, and alerts your team of any errors, your team can then go on and spend that same time taking care of other items on their to-do list.

With the aid of technology, you stand to run your processes 100x faster and reduce errors by 90%. This leads to having more time to provide greater insights for more informed decision making!

2. Aim for Standardization

As global teams continue to expand, the desire for standardized processes across locations only grows. Yet, when processes, especially complex financial processes, are being performed manually, it’s nearly impossible to maintain total internal control and ensure standardization.

But, standardization is beneficial for regulatory reasons, as well as practical considerations. Finance automation software makes standardization possible and technically built-in. As a result, you can also remove key person dependencies, map out processes, and enable scalability.

3. Focus on Documentation

Since your accounting reconciliation process may be legally regulated and reviewed, its proper documentation is paramount. For every action performed or adjustment made, it must be adequately noted and stored. Automation software handles this for you with audit trails.

4. Fix Errors Quickly

Since the main purpose of any accounting reconciliation process is 100% accuracy of data and account balances, it’s advisable to fix any errors quickly. This helps to ensure that they don’t continue or balloon out of control.

What are the Types of Reconciliation?

There are multiple types of reconciliation (and the good news is, automation can help with every type!) Here’s a look at some of them:

1. Bank Reconciliation

Bank reconciliation is one of the most common types of reconciliation, which is the process by which businesses compare their bank transactions and statements with their internal statements.

2. Customer Reconciliation

For businesses that provide credit terms to customers, customer reconciliation is necessary to make sure that the accounts receivable ledger is matching up with the receivables control account in the general ledger.

3. Intercompany Reconciliation

For parent companies, intercompany reconciliation is conducted to make sure that the parent company reflects accurate accounts. Any debt from one company should balance out with the credit in another if it’s owned or owed.

4. Vendor Reconciliation

When dealing with vendors, you’ll need to get vendor statements from them because they aren’t automatic like bank statements. Once you do, cross-check these supplier statements and the balance owed in the payable ledger and overall balance internally.

What are the Steps in Reconciliation?

Each business has the freedom to perform their account reconciliation process however they choose. However, there are required steps that take place, such as:

1. Data Collection

To begin, the responsible party must have access to all relevant data. If this is manually conducted, it can end up taking a lot of time, especially if multiple systems and payment processors are being used.

With automation software, the tool will connect data systems, and centralize all required information.

2. Transaction Matching

Once records are available, it’s time to run through them line-by-line to see if they match up. Again, manually performing this is not only time consuming, but also error-prone.

This is especially true when you’re dealing with a high volume of transactions from multiple payment providers (i.e. Amazon, eBay, Worldpay, PayPal, etc.). Transaction matching then seems like a never-ending and tedious task.

Finance automation software does it for you in less time with greater accuracy.

3. Reconciliation and Reporting

For any discrepancies, adjustments should be made upon completion of the investigation. Then, it’s time to generate a reconciliation statement and report.

What Causes Reconciliation Discrepancies?

As you perform the accounting reconciliation process, it’s very common to run into mismatched records or account balances. Have no fear- this is why the process takes place - to figure it all out.

There are some explainable reasons why your records wouldn’t match up. For the genuine mistakes made, there are typically ways to fix them.

1. Manual Mistakes

When it comes to a manual accounting reconciliation process, the chances are high that you’ll find at least one (but probably several more) manual errors. It’s a data heavy and time-consuming process that relies on utmost accuracy, but human errors are inevitable.

2. Timing Delays

For errors that aren’t manual, it could be nothing more than a timing delay between systems. For example, if you deposit a check into your business’ bank account, it doesn’t always show up right away because it has to be processed.

If you perform account reconciliation between the time it takes to process, your records may not match up, but it makes sense why they wouldn’t be yet.

3. Unrecorded Transactions

It could be the case that a transaction got lost in the shuffle. As transaction volume grows and the use of multiple payment processors expands, unrecorded or missing transactions may become more common.

That is, unless you use an automation solution that can connect your data systems in real-time.

What are the Benefits of Reconciliation Software?

As you can see (or have witnessed in practice), manual account reconciliation has its fair share of challenges. Reconciliation software is designed to help business executives and on-the-ground employees to simply overcome the hurdles of reconciliation.

Reconciliation software makes it possible to:

• Reduce key person dependencies
• Connect data
• Expedite and standardize the process
• Improve accuracy
• Save time
• Protect version control
• Provide audit trails
• Reduce compliance and fraud risks
• Streamline reporting
• Enhance internal control

Account reconciliation software has the power to increase your team’s productivity by up to 85x. With an out-of-the-box solution deployed without the need for a dedicated IT team, your team will have more time open to spend on high-level and strategic tasks. It’s a win-win for everyone!

Wrap Up

The accounting reconciliation process isn’t a one-size-fits-all workflow, but it is required by all businesses to keep track of their financial health and generate correct financial statements.

‍Account automation software is a one-size-fits-all solution that can aid in reducing errors, streamlining the process, connecting data systems, and providing access to analytics to better your business overall.