Reconciliation Accounting: What it Means for Finance

Keeping your business finances in order is critical for proper business functioning. To make sure that your books are accurate, you will have to rely on reconciliation accounting. The aid of technology and automation tools have made reconciliation accounting more accurate and more accessible to do than ever before. 

We will outline what reconciliation accounting means for finance and how your team can maximise productivity with the aid of reconciliation accounting tools. 

Table of Contents

1. What is Reconciliation?

2. Understanding Account Reconciliation

3. Reconciliation in Business Accounting

4. Why Reconciliation is Important

5. The Account Reconciliation Process

6. Types of Reconciliation

7. How Automation Software Helps‍

8. The Bottom Line

What is Reconciliation?

Reconciliation is the process of making sure that accounts in two different books match at the end of each period. It works by comparing transactions and documentations to what’s marked in ledgers and balance sheets. Reconciliation also entails pinpointing discrepancies, finding their source and resolving them. 

Reconciliations play a role in automating the financial close process. They do so by comparing balances in independent systems and verifying statements and reports. The importance of reconciliation accounting cannot go amiss because it’s regulated by the Sarbanes-Oxley Act, in which it states that public companies must share their assessment of internal financial reporting controls in their annual report.

Since account reconciliation can impact compliance risk, it’s paramount that businesses perform this process promptly. Luckily, software systems like SolveXia have made it possible to pull data from various sources and perform reconciliation automatically. 

Understanding Account Reconciliation

Although there isn’t one standard way to perform account reconciliation, there are standards like the Generally Accepted Accounting Principles (GAAP) that call for double-entry accounting. This means that you have to enter a transaction in the general ledger in two locations. This way, it’s easier to catch errors should they arise. 

Transactions are to be recorded in both the income statement and the balance sheet. While one receives a debit, the other account receives a credit. As you can see, double-entry accounting relies on data entry. Shifting this process to an automated solution can reduce human error in data entry, improve compliance and speed up the reconciliation process so that the finance team can focus on more high-value tasks driving analysis and insights to the business. 

Reconciliation in Business Accounting

Reconciling business accounts does more than overseeing financial status. It helps to find errors, avoid negative opinions from auditors and can also help to assess fraud. Every month, a company should reconcile balance sheets when the books from the previous month have been closed. If things were recorded incorrectly in the general ledger and it comes to light from comparing the balance sheet, then the journal entries must be adjusted. 

Why Reconciliation Is Important

Reconciliation is necessary on various levels within a business. Not only does it play a significant role in compliance, but it also helps to maintain accurate financial statements which can impact decision-making. 

Reconciliation accounting covers the following bases:

Prevents overdrafts: Comparing transactions will help avoid overdraft from cash accounts because records are up-to-date even if bank statements are still pending. 

Quels negative activity: Reconciliation helps to expose fraudulent credit card transactions or incorrect entries.

Ensures accuracy: Having transactions recorded in two places ensures that your financial reports are accurate. 

Adheres to regulations: Balance sheets must be accurate based on government regulations, especially when it’s a public company. The timely completion of account reconciliation reduces compliance risk. 

The Account Reconciliation Process

Numbers and data bog down your finance team. If you implement an account reconciliation software tool, it will do the heavy lifting for you. That way, your team can spend their valuable time on high-value tasks like data analytics rather than data entry. Maximising your team’s time will solve for inefficiencies and help reduce costs overall. 

Many businesses have multiple accounts. This means that they may have their bank statements and financial information saved in different systems, spreadsheets and sources. When it comes to the reconciliation process, it involves people manually checking between various documents and then passing it along for approval to the next person responsible for their part of the puzzle. However, this becomes a timely and error-prone process. Without data in a centralised location, it’s hard to know that you have complete information to perform the reconciliation process. 

Not only can human error occur, but if data is missing, it can cause big problems. Automating the reconciliation process streamlines the flow. On top of that, your team knows where all information can be found, at any point in time since it’s historically stored in the centralised system. Since account reconciliation plays a large role in compliance, audit trails help to retain and report all data that is used or updated throughout the process. 

It also ensures that only people with access can take part in viewing or editing the documents. Every person in your team knows their role and responsibility to complete what would otherwise be a time-consuming and repetitive manual task. The process can be standardised and run smoothly across your organisation without any hassle. This is what the process looks like, which will still entail some human intervention for recording cash transactions:

1. Compare the internal register

You’ll want to check that every deposit and payment on your register matches your bank statements. If you are missing a receipt or check for a transaction on your bank statement, make a note of it. 

2. Check records of outgoing funds

‍Subtract all outgoing funds from your bank statement balance, including checks, ATM transactions and charges. Be sure to make a note of auto-payments that have yet to clear, service charges from ATMs, overdrafts or uncleared bills. 

3. Check incoming records

‍Locate deposits or credits that have yet to be reflected on your bank statement if there are transactions that your bank shows that your internal books don’t, add the entries. Be sure also to add any interest accrued past the statement date. 

4. Check for errors

‍It’s unlikely but possible that bank errors can occur. These should be subtracted or added to your account balance. Report the error to the bank ASAP. 

5. Ensure accurate balances

‍Both your internal books and bank statement balance should now match. If there are differences between the two, you have to create a supporting schedule of why they differed. 

Types of Reconciliation

When managing reconciliation accounting, you can break down the kinds of reconciliation as follows:

• Bank reconciliation 
• Customer reconciliation 
• Vendor reconciliation 
• Inter-company reconciliation 
• Business-specific reconciliation 
  

Businesses must perform bank reconciliation to detect errors, track bank fees, oversee accounts payable and receivable and expose fraudulent transactions. 

How Automation Software Helps

Balance sheet reconciliation has become increasingly important since the Sarbanes-Oxley Act passed in 2002 and has been followed by similar legislation worldwide. It has meant that account reconciliation procedures are no longer the responsibility of auditors, but of the business itself. To protect shareholders’ interests and the general public, the field is regulated and controlled, so it works in a business’ best part to be accurate with reconciliation. Otherwise, you can face significant fines, legal repercussions and even a business shutdown. 

That’s why automation software can help improve reconciliation processes, removing many of the risks involved, improving accuracy and reducing errors within this process. Here’s how automation software helps:

Automated workflow and approvals: Account reconciliation relies on team members to work together and be aware of the process’ standing. As such, automated workflows can be set up so that the process runs through its checks and balances to receive approvals without being delayed. 

Standardisation of the process: Reconciliation is something you’ll do every month, make data consistent and removing errors. It also connects with all legacy systems. 

Compliance audit reports and trails: Automated software solutions like SolveXia provide a business with the peace of mind to know that everything touched within the system will be recorded. User access controls and roles determine who has the right to amend and share data. With each entry, the action is recorded to easily produce audit trails and reports for internal and external oversight.  

The Bottom Line 

Running a business means that reconciling accounts is mandatory. However, it’s up to you to decide what kind of automation tool you want in aiding your team to perform account reconciliation. SolveXia has made it easy for businesses to get up and running with automation software that requires no coding and is user friendly. It makes it possible for your team to use their time on high-value tasks while giving them the necessary information to only focus on variances and exceptions within the reconciliation process. 

For reconciling accounts, performing data analytics and providing insights for timely business decision-making, SolveXia can help you maximise your productivity and ensure that your financial data is safe and accurate.