Tips for Reconciling Accounts
Account reconciliation is perhaps the most important single aspect of business finances. Whether you do the reconciliation yourself, have an in-house financial services department, or use an accountant, you should have a solid understanding of what goes into balancing your books.
Here we will focus on the basics, beginning with defining account reconciliation. Next, we will discuss the kinds of accounts you can reconcile, and we will end by examining the different programs and software available to keep your accounts balanced and accurate.
What Does Reconciling Accounts Mean?
The reconciling accounts definition is straightforward. It’s comparing sets of records to ensure they are complete, correct, and match.
Think of business account reconciliation just like balancing your personal checkbook, only on a larger scale. Reconciliation is essential for business accounting because the process protects against fraud and other potential problems such as:
- Checks that are returned after being deposited
- Voided checks being cleared by the bank
- Double payment
- Missing and uncleared checks.
It’s recommended to complete reconciliation at least once a month. You’ll need the same attention to detail and accuracy as you would when taking care of your personal expenses. If that is an area where your skillset comes up lacking, don’t try to reconcile your accounts yourself.
That is why accountants exist!
What Are the Steps in Account Reconciliation?
The steps to completing account reconciliation are very straightforward. Start by gathering your two sets of records – the ones from the bank and your business.
Of course, you can use paper records if you prefer, but most companies maintain spreadsheets that are easy to use with a digital bank statement. If you use accounting software, you might even be able to integrate your bank statements.
Starting from your last reconciliation, ensure that all your deposits and withdrawals are accounted for, and your books match the bank statements.
If there are any discrepancies, like outstanding checks or deposits that haven’t cleared yet, make any changes that you need to.
Once the accounts are matched, confirm that both accounts have the same ending balances. If the ending balances match, then your reconciliation is complete. If they don’t, then you will need to repeat the process to find the problem.
What Accounts Need To Be Reconciled?
All of your business accounts need to be reconciled, with no exceptions. How often you do this is up to you.
Some businesses are big enough and busy enough that they reconcile every day or every week. Smaller companies typically reconcile monthly. Depending on what kind of venture you have, you may reconcile any or all of the following:
- Bank accounts/cash accounts
- Accounts payable
- Accounts receivable
- General ledger
- Balance sheet
- Control accounts
- Inventory
Reconciling Bank and Cash Accounts
Your business’ cash accounts are reconciled against a bank statement. This is where you would notice any cash fraud or manipulation. Don’t expect the ending cash balances of your two records to match. Variations between your cash and bank accounts are fairly common as a result of any of the following:
- Deposits in transit: Checks or cash recorded in your account but not processed yet by your bank.
- Outstanding checks: Checks that have been issued by your business that have not been processed.
- Service fees: Some banks still charge service fees on certain types of bank accounts.
- Interest income: Sone banks pay interest on certain types of bank accounts.
- Not sufficient funds (NSF) checks: Also known as returned or bounced checks. If a customer pays you by check and lacks the funds, the bank will return it to the depositor as an NSF check. If your business is bouncing checks, you have a problem that needs fixing. In the meantime, get overdraft protection to avoid being hit by fees.
Reconciling Accounts Payable
Accounts payable is the amount of money you owe. It’s similar to the commercial version of an IOU. When you first start your company, suppliers that provide you with products or services will set up an account due once or twice a month. These accounts must be paid regularly.
It is possible to have several types of accounts payable, ranging from office supplies to your inventory and even services.
Tracking your accounts payable is crucial. If reconciliation shows an increase in AP over the previous period, you buy on credit more than you pay with cash. A decrease in AP shows that you are paying your debts faster than purchasing new items on credit. Managing your accounts payable is an important part of controlling your business’ cash flow.
Both accounts payable and accounts receivable use an aging report and a general ledger account for reconciliation.
An aging report is basically a document outlining your invoices and accounts due, as well as the amounts owed. A well-maintained AP aging report will give you the ability to see which accounts need payment and when.
To reconcile your accounts payable, review the ledger to see if any payments were made during the review period. If so, start a reconciliation document to record them. Then, print the aged accounts payable report for the same period. Finally, put the total amount outstanding in your reconciliation document. Reconciliation should be complete now, but additional reconciliation may be necessary if there is an unexplained variance.
If you do have such a variance, take another look at your records. Your accounts payable should be properly posted to the general ledger. The aged accounts payable report should be printed after all payment posting is complete. The general ledger should be set to the correct reporting period.
Reconciling Accounts Receivable
Accounts receivable is the opposite of accounts payable. Instead of money going out, AR is money coming in. It is any money your customers owe you for goods and services purchased in the past on credit. When you record AR on your balance sheet, it goes down as an asset because they have value for the company, unlike a debt.
Like AP, AR uses the general ledger and an accounts receivable aging report for reconciliation. The aging report will tell you which customers have overdue balances and how long they have been delinquent. Compare the ending ledger balance for the reconciliation period to the aged AR report. If they match, reconciliation is complete. If they don’t, check for errors as follows:
- Look at your detailed sales ledger and the general ledger. If a transaction is recorded in one but not the other, it will cause a variance. This is the most common reason for inconsistencies.
- Billings were posted to the wrong account. This is extremely rare due to redundancies in billing and automatic payments.
- The aged receivables report was run on a different date than the general ledger report.
Accounts receivable reconciliation typically happens at the end of every month so that a business can issue financial reports to investors.
If you don’t reconcile AR every month, then you need to do it at the end of every fiscal year at the very least.
This is so that any inaccuracies are checked and fixed before your external auditors see the finances.
General ledger Account Reconciliation
The general ledger is the central record of all a company’s financial transactions. If your general ledger isn’t kept up to date and accurate, then none of your accounts will be correct.
To begin GL reconciliation, you first need to verify that the ending balances for the previous period match the beginning balances for the current period. If they don’t, you’re a step behind already, so make sure to check for errors every reconciliation period.
Once the balances match, you can start your general ledger audit. Going account by account, look at all the transactions listed in your ledger. Then, compare the amounts with any invoices and other documentation to make sure they match. Some accounts can be automated, like bank accounts, but others will need to be done by hand, either on paper or with software.
If you manually record your transactions, always verify that your journal and your general ledger match. This is the one place that errors are made using manual accounting.
It is very easy to make a mistake recording a transaction, and clerical errors are also possible. In addition, transposed numbers can cause havoc in your ledger.
Reconciling Balance Sheet Accounts
Balance sheets are summaries of your business’s financial account balances, income, and expenditures.
They serve as a snapshot of your company’s financial health and are often part of the financial package given to investors and boards of directors.
Balance sheet reconciliation just looks at the general ledger rather than the in-depth records maintained for other accounts.
Reconciliation will verify that your company books have been balanced. It may not seem that important, but balance sheet reconciliation is actually a vital part of closing out your books.
Accurate balance sheets let you and your investors confidently make strategic business and financial decisions in an effective and timely way.
Control Accounts Reconciliation
Control accounts are used when a business wants to keep the general ledger clean and neat. A control account uses a subsidiary ledger to record all of the detail. After reconciliation, the totals from the subsidiary ledger are transferred to the general ledger. The breakdowns stay in the subsidiary ledger.
As with all your accounts, the balances sometimes don’t match. But with control accounts, the error is typically in the transfer of balances.
Transposition of numbers is the most frequent mistake, but others include balances in the wrong location in the ledger and omission errors.
Reconciling Inventory
Reconciling inventory is time-consuming, but it is not difficult. It’s the process of physically counting items you have on hand and matching them with your stock records.
Reconciling your inventory is important because it allows you to see where loss is happening or any problems with record-keeping. Other reasons for problems with stock include human error, supplier fraud, missing paperwork, and more.
Reconciliation Accounting Software
If all of this sounds entirely too complicated, don’t panic! You don’t need to spend hours doing your books, fixing mistakes, and reconciling your accounts.
Unless you are a large corporation with an in-house accounting department, you really don’t need to hire someone to manage your books, either.
Accounting software has moved businesses away from the days of Ebeneezer Scrooge with his big ledger book.
Instead, these programs automate parts of the process and streamline others.
Account reconciliation software offers a centralized platform for monthly and yearly budget closeouts.
Reconciliation happens quickly because the software pulls information from the general ledger automatically. Then, it compares that data with bank accounts, invoices, and other documents to easily reconcile the accounts.
What Features Should Be Included?
When considering reconciliation software, you’ll want to make sure it has the following features:
- Reporting
You want software that will highlight discrepancies between a bank statement and the general ledger. The software should also let you view and compare reports from previous weeks, months, or years.
- Issue management
Your software should identify issues and exceptions and maintain the data going forward. Rolling the problems forward into subsequent reconciliation periods will automatically save you time in the long run.
- Transaction matching
This is the most important function you want from your software tool. With transaction matching, the software can pull data from various sources to compare and match it according to rules that you set.
Choosing the Right Software
There is no single right way to choose the best software for your business. You really will have to look at the available options and weigh them against your needs.
For example, if you run a small business and are pretty handy with a spreadsheet, then you probably don’t need the fancy solutions just yet. Instead, you can get by with Excel or QuickBooks.
However, if you have a bigger business or more complex accounting needs, it would be beneficial to consider investing in an automated solution sooner rather than later. Choosing software is personal, and no one program or package can be all things to all people.
SolveXia offers a summary of some of the popular software applications that can reconcile your accounts.
Conclusion
Reconciling your business accounts sounds time-consuming and a little bit frightening. However, it is actually pretty easy.
Understanding the types of accounts and their various reconciliation processes is the first step in the process.
Take your specific business and your abilities into account when deciding whether to invest in special reconciliation software. Before you know it, your business finances will be in proper order, and your stress level will be under control again.