Account reconciliation: What it is and how it works
What is account reconciliation?
In accounting, reconciliation involves reviewing two sets of records to verify that the figures are correct and the records agree. To ensure accurate financial reporting, companies reconcile their accounts at the end of each accounting period, such as monthly or quarterly. This procedure identifies any discrepancies in the records that need to be investigated to ensure that the books are balanced.
Types of account reconciliation
Bank reconciliation is the most common type of reconciliation in accounting. It involves cross-referencing supporting documents like invoices and receipts against your bank statements to identify discrepancies or missed payments.
A vendor reconciliation involves reviewing your accounts payable records to ensure they match vendor and supplier statements. This step ensures you’ve paid the correct amount and aren't missing any payments. It also helps to identify any discrepancies between their records and yours that you need to resolve.
Customer reconciliation compares your financial records with those of your customers to check that they both tally. This process lets you track incoming cash and outstanding payments and may involve adjusting the company’s accounting records to reflect the correct amount owed by the customer.
Business-specific reconciliation compares company records at the start and end of an accounting period to verify that your internal records accurately reflect the number of products or services sold. Your business type will determine how you carry out this task.
Inter-company reconciliation involves comparing the ledgers of subsidiary companies with those of the parent company to identify discrepancies. This process helps to make sure that the consolidated financials of a corporate group are accurate, and that intercompany transactions are properly accounted for.
Why is reconciliation important in accounting?
Account reconciliation is critical because it helps identify discrepancies between financial records that need to be resolved to uphold accuracy. It also supports other functions, such as:
Identifying fraud by flagging inflated invoices, unauthorised transfers and missing deposits
Recognising business process shortcomings that can result in incorrect data, misplaced documentation and duplicate entries
Monitoring for theft from employees or external parties
Supporting the accurate completion of audits and tax returns
Developing internal controls to ensure accuracy and security.
Also, failing to reconcile your accounts can have severe consequences. You risk overdrawing your business accounts and incurring fees, plus you may not be able to detect fraud and errors that can impact your bottom line. Creditors can also take legal action if you miss payments. Regular account reconciliation is necessary to maintain visibility and control over your company finances.
When should a business reconcile accounts?
It’s common practice for companies to reconcile their accounts at the end of each month. However, this can vary by industry. For example, high-volume businesses or industries with a high fraud risk might choose to reconcile their accounts more frequently. Regularly reconciling your accounts is crucial to avoid sifting through a backlog.
How to perform account reconciliation in 9 steps
1. Determine the scope of your reconciliation
Identify the accounts or statements you're addressing, whether from a bank, vendor, customer or internal. Setting clear parameters upfront will streamline the reconciliation process and help to ensure accuracy.
2. Collect and organise necessary records
Before you begin, gather all relevant documents like statements, invoices and company records. Organising them chronologically or by type can make cross-referencing more efficient and manageable.
3. Account for all activities
Thoroughly review the external statement or list of transactions, checking that every entry during the period appears in your company books. If something is missing or doesn't correspond, flag it for further investigation or adjustment.
4. Review and adjust internal and external records
Methodically cross-reference your company records against the external statement or list of transactions. If there are discrepancies, you'll need to address them with the stakeholder/s involved, ensuring you have sufficient evidence for any changes you'd like them to make to their records.
5. Document any discrepancies and their potential reasons
As you identify differences, make a detailed note of each. Documenting errors and their possible causes helps during the current reconciliation and can prevent similar discrepancies in future cycles.
6. Consult an expert on complex issues
Consult an accountant or financial expert if a discrepancy is difficult to understand or fix. They can help you identify the source of the problem and provide the most appropriate resolution. Seeking professional help can also help you avoid potential legal issues.
7. Compare the ending balances of both records
After adjusting, compare your company's ending balances with those on the external statement. If they align, it's a successful reconciliation, but if they differ, it's time to revisit previous steps.
8. Develop prevention strategies
Reflect on the account reconciliation process and identify any recurring or significant discrepancies. By recognising patterns or common errors, you can implement strategies to minimise these discrepancies in the future.
9. Complete the process with documentation and sign-off
When account reconciliation is complete, document the process and any adjustments. Then, obtain sign-off from a responsible authority in your organisation to ensure accountability and oversight.
Common issues found during account reconciliation
Even the most meticulous business owners encounter reconciliation errors occasionally. Such discrepancies could arise from overlooked receipts, misplaced dates or duplicate records. Regular audits can help spot and rectify these issues early on.
Here are some common challenges you might face during reconciliation and suggestions for resolving them:
The reason for a transaction being returned can vary and may include insufficient funds, errors in account information, disputes, authorisation issues or other factors. Proper accounting and record-keeping is necessary to reflect the reversal of the transaction accurately in financial statements.
These can manifest as double payments in bank accounts, repeated invoices in accounts payable or duplicate sales entries in business-specific reconciliations. It's vital to cross-check records, verify with the other party if needed and correct the duplicates.
Address unresolved issues as soon as possible, such as unmatched invoices in vendor/customer reconciliations. Record all communications with the counterparty if items remain pending for an extended period.
Mismatched data in inter-company reconciliations
There may be discrepancies between subsidiaries and parent companies due to differences in recording transactions, currency conversion or timing issues. Identifying the root cause and adjusting ledgers are crucial.
Automate bank reconciliation with MYOB
Account reconciliation is an important process that makes sure your books are balanced and no financial issues slip through the cracks. However, it can be a time-consuming manual task if you don’t have accounting software that facilitates this process.
With MYOB, bank reconciliation doesn’t have to be done manually. MYOB’s bank feeds automatically pull in your transactions and create a bank reconciliation statement so you can quickly compare and approve items.
This gives you more time back to focus on what really matters — running your business and providing an amazing experience to your customers.
Get started with MYOB today.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.