Reconcile Transactions: Advanced Tips for Finance

There are sufficient explanations, like the timing of transactions, that could explain why businesses have different balances on account statements. However, it’s important that these transactions be accounted for and reviewed before closing the books. There are various reasons why it’s vital to reconcile transactions, which we will outline in this article. We’ll also share some tips on how to reconcile accounts and how automation tools help to make the process easier.

Coming Up

1. What Does Reconciliation Accounting Mean?

2. Why Reconcile Transactions and Accounts?

3. Reconciliation Process: How to Perform Bank Reconciliations

4. Why Perform Bank Reconciliations?

5. How Automation is the Future to Reconcile Transactions

6. Wrap Up

What Does Reconciliation Accounting Mean?

Reconciliation accounting is the process of comparing sets of financial records to make sure that they are in agreement. Businesses compare internal financial records like the general ledger to external statements like bank accounts or credit card statements. It’s also possible to compare the general ledger to sub-ledgers to make sure there’s no evidence of fraud or corruption taking place internally.

With accounting software tools, reconciliation accounting can be performed in a fraction of the time it takes to manually compare hundreds or thousands of line items.

Why Reconcile Transactions and Accounts?

Reconciling accounts is just one way to maintain strong internal controls over your finance functions.

Additionally, if you’re running a public company, it means that account reconciliation is mandatory and regulated. However, even if your business isn’t public, reconciliation is a crucial activity that should be taken seriously and performed on a regular basis.

This is because reconciling accounts helps to:

• Catch mistaken charges and rectify them
• Explain timing differences of payments and transactions
• Reduce fees (i.e. overdraft fees)
• Spot any improper spending (in time to fix it before it spirals out of control)
• Ensure that financial statements are of high-quality and accurate
• Reduce audit risk

Reconciliation Process: How to Perform Bank Reconciliations

There are various types of reconciliation, and bank account reconciliations is one of them. To perform a bank reconciliation, it requires a business to compare their bank statements from their own internal records.

The process works as follows:

• Get a copy of your bank statement. Banks typically send out monthly statements either by paper in the mail or electronically. It’s also possible to obtain a record of your bank statement digitally by logging into your account. Get your accounting journal ready to compare.
  

• Within your internal ledger, add any interest the account may have accrued, along with any bank fees that are charged. If there are no outstanding deposits or checks, then the balances should, in theory, match. However, bank statements aren’t updated in real time, so some deposits and checks won’t be reflected by the monthly statement.
  

• Now, it’s time to compare each entry. Since the bank may have a timing delay, ensure that the deposits and withdrawal amounts are in accordance with one another.
  

• If there’s a discrepancy, define the nature of it. Look back to checks and deposit slips to determine which amount is right. Then, see how it affects your balance - it could be showing up as more or less money than you actually have.
  

• If the bank has made an error, notify them immediately and provide the documents to prove it.
  

• If your ledger is incorrect, correct the entry so that the balances will match. This may take place in the income column or the deductions column, depending on the error.

Why Perform Bank Reconciliations?

Bank reconciliations are one of the most common forms of account reconciliations performed. The importance of performing this process cannot go unnoticed because it affects your business decisions. If you believe you have more money that you actually do, you may be willing to take more risks or launch a new product. But, if the figures are different in reality, then you may have chosen a different route.

Bank account reconciliation is important for several reasons, all of which can make or break your business. Let’s review what it provides:

Reduce Banking Mistakes

Although it may not be common, banks can make mistakes. Reconciliations will display which transactions have cleared, but it could also show that a certain transaction is recorded for the wrong amount. In order to catch the banking mistake, you’ll want to review the original financing record.

That does mean that you’ll be storing a lot of receipts, and according to the IRS, you should do so for at least three years. This could end up taking a lot of space and being hard to organise. However, you can leverage financial software to store records and digitise receipts. Not only does this help save physical space for storage, but it can also make it easier to organise and query when you notice a mismatched amount.

If you find that the bank made a mistake, get in contact with them to rectify it. If, instead, your records are incorrect, then update the entry. When working with a financial automation tool, you’ll be able to add a note so that anyone with access will be able to see what and why a record was manipulated.

‍Reduce Company Fraud

Fraud poses a very real risk to every type of business. Whether it is the case that an employee is committing fraud or incorrect data that creates a cause for concern, automation tools can aid in reducing such risks.

With process automation, software tools carry out processes in a standardised and well-controlled environment. By utilising automation for data collection, storage and transfer, you lessen the likelihood of error from occurring. Additionally, if any employee or customer is committing fraud, then the system will alert users that something odd is transpiring whenever a piece of data stands out as extraordinary.

Reduce Forgotten Transactions

A deposit may take place on Monday, but only show up in your bank account on Wednesday. These types of transactions are called deposits in transit or outstanding checks. While it’s normal to have these types of transactions, it could be possible that someone has forgotten to deposit a check into the bank account. Given the massive amounts of tasks that accounting departments have on their plate, it may have been completely unintentional, but it will still have real effects on your balance.

Reconciling bank accounts can help to remember these forgotten transactions. Additionally, if you find that this is occurring within your organisation, it may be time to add automation into your workflows so that everything is neatly organised, managed and processed without bottlenecks.

How Automation is the Future to Reconcile Transactions

The time spent performing manual account reconciliations varies based on company size, number of transactions, number of accounts, etc. Adding to the time it takes to perform, there’s also opportunity cost to consider. Rather than having your high-level team working on the repetitive, time-consuming task of collecting data and combing through it line-by-line, they could be working on enhancing business strategy, for example.

The latter are just two major reasons why it’s so useful to deploy an automation solution to manage this business process. Automation tools are best suited for processes that are repetitive in nature, time-sensitive and high volume of data– all of which perfectly describe the reconciliation process. Automated account reconciliation helps to reduce errors, maximise efficiency, and streamline reconciliation to reduce delays.

Wrap Up

Account reconciliation is a business process that will be necessary as long as transactions take place. Whether it’s regulated for your business to reconcile transactions or not, it’s an action worthwhile to take to reduce costs, catch fraud and ensure that financial statements are accurate.

Furthermore, by utilising automation software to manage the process, your accounting department can better allocate their time to high-value work and you can rest assured knowing that the process is being carried out impartially and on time, as frequently as you want it to be.‍