Reconciliation in finance and accounting refers to the process of comparing transactions recorded internally against monthly statements from a bank, credit card company, or other external source. The aim of account reconciliation is to ensure the records coincide with each other.
You can find your financial transactions on your bank statement, your credit card statement, and the paper check register that you update every time you write a new check. If you use an accounting software, the software’s account register will keep track of your transactions for you.
Importance of Account Reconciliation
It is important to compare transactions and balances to prevent overdrafts on cash accounts. Account reconciliation can also make it easy for you to catch negative activity, such as fraudulent credit card transactions, and stolen or inaccurately recorded income and expense entries. Reconciliation may offer an explanation for timing differences.
You should perform account reconciliation to prevent your company from paying hefty fees from overdrafts. It can also help you catch issues like improper spending and embezzlement before too much damage is caused. Reconciliation will help you keep your company’s transactions free of errors.
Comparing transactions and reconciling accounts will make it easier for your accountant to produce financial statements that are reliable, high-quality, and accurate. All the money spent by your company will be reflected by the company balance sheet. This includes cash, credit, loans. The company balance sheet also reflects the assets bought with these funds. The accurate reconciliation of the financial accounts of your company is essential to ensure the accuracy of the company balance sheet.
In order to avoid penalties, publicly held companies must reconcile their accounts consistently. Most companies have established systems for keeping track of account statements, payment receipts, and other documents needed for reconciliation accounting.
The Process of Reconciliation
If you use an accounting software, you can count on the software to do a portion of the process of reconciliation for you. Therefore, using a good accounting software is one of the best ways to speed up the bank reconciliation process. However, human involvement is still necessary to take certain transactions into consideration. Typically, you will need to account for the transactions that have not been entered the accounting system.
You should compare the internal account register to your bank statement and ensure every payment and deposit on the register corresponds to an entry on the statement. Be sure to note the transactions on the bank statement that you don’t have proof for in the form of a check stub or payment receipt.
Be sure to identify any money that doesn’t show up on your bank account statement as a paid amount but is shown as paid out in your records. This includes ATM transactions, checks, and other charges. You should subtract these items from the balance of your bank statement.
Reconciliations are important to conduct to ensure your account records coincide with each other. For more information about the importance of reconciliation, don’t hesitate to contact us.