Account Reconciliation: Process, Challenges, Best Practices
Companies use this process to prevent fraud, ensure their records are consistent, and stay compliant. To ensure accuracy and balance, the process of account reconciliation involves comparing the balances of general ledger accounts with the supporting sets of data sources, such as bank statements, invoices, and receipts. Beyond bank reconciliation, lawyers should conduct account reconciliation with other accounts to help ensure that they maintain accurate financial records, uphold ethical standards, stay compliant, and maintain client trust. Reconciliation in accounting is needed whenever there are financial transactions to ensure accuracy and consistency in the records. It’s typically required at regular intervals, such as monthly, quarterly, or annually, to verify that internal records match external statements like bank accounts, supplier invoices, or customer payments. Reconciliation is also necessary before financial reporting, audits, and tax season preparation.
Most importantly, reconciling your bank statements helps you catch fraud before it’s too late. It’s important to keep in mind that consumers have more protections under federal law in terms of their bank accounts than businesses. So it is especially important for businesses to detect any fraudulent or suspicious activity early on—they cannot always count on the bank to cover fraud or errors in their account. However, generally accepted accounting principles (GAAP) require double-entry bookkeeping—where a transaction is entered into the general ledger in two places. When a business makes a sale, it debits either cash or accounts receivable on the balance sheet and credits sales revenue on the income statement.
Why Is Account Reconciliation Important?
Finally, without adequate account reconciliation processes in accrued expenses place, both internal and external financial statements will likely be inaccurate. Reconciling law firm trust bank accounts regularly via three-way reconciliation allows you to uphold your duty to keep proper, accurate accounting records for client funds held in trust, while also ensuring you stay compliant. Individuals should reconcile bank and credit card statements frequently to check for erroneous or fraudulent transactions. If a personal ATM or debit card was involved in a fraudulent transaction, an individual’s liability is limited to $50 if they notify the bank within two business days, but rises to $500 after two days and up to 60 calendar days. After 60 days, the Federal Trade Commission (FTC) notes, they will be liable for «All the money taken from your ATM/debit card account, and possibly more—for example, money in accounts linked to your debit account.»
At its core, account reconciliation involves comparing two sets of records to check that the figures match. The document review method involves reviewing existing transactions or documents to make sure that the amount recorded is the amount that was actually spent. The first step is to compare transactions in the internal register and the bank account to see if the payment and deposit transactions match in both records.
- It is prudent to reconcile credit card accounts and checkbooks on a regular basis, for example.
- But given the large volumes of data, matching records or reconciliation can be a strenuous activity.
- Account reconciliation is the process of cross-checking a company’s account balance with external data sources, such as bank statements.
- This is true for both businesses and individuals, who should both verify every transaction individually, making sure the amounts match perfectly, and, if not, making note of any differences that need further investigation.
AP & FINANCE
Also, check previous years’ audit reports to identify repetitive mistakes and actions recommended by the auditors. If needed, work with third-party finance consultants to identify gaps and put together a transformation plan for your payroll calculator finance department. Depending on your business, you may also want to reconcile your inventory account, which is typically completed by doing a complete accounting of all inventory on hand. By taking advantage of technology and automation in this way, you can save time and avoid duplicate data entry errors.
For example, a transaction that may not yet have cleared the trust bank account could be recorded in the client ledger, but may not yet be visible on the trust account bank statement. Bank reconciliation is an accounting process where you compare your bank statement with your own internal records to ensure that all transactions are accounted for, accurate, and in agreement. By catching these differences through reconciliation in accounting, you can resolve discrepancies, help prevent fraud, better ensure the accuracy of financial records, and avoid regulatory compliance issues. It not only allows you to protect your clients’ funds, but your firm too as a result.
Q3. Why does accounting reconciliation matter for businesses?
Reconciling the company’s accounts helps detect fraud and aids in regulatory compliance. Moreover, internal account reconciliation enhances financial transparency and accountability, critical for building trust with stakeholders, whether they are investors, customers, employees, or vendors. While scrutinizing the records, the company finds that the rental expenses for its premises were double-charged. The company lodges a complaint with the landlord and is reimbursed the overcharged amount. In the absence of such a review, the company would’ve lost money due to a double-charge.
Credit card reconciliation
But, if there are discrepancies due to pending charges or interest fees, reconciling accounts helps identify and correct the amounts owing, ensuring the company’s records match the external document. The objective of doing reconciliations to make sure that the internal cash register agrees with the bank statement. Once any differences have been identified and rectified, both internal and external records should be equal in order to demonstrate good financial health. For example, the internal record of cash receipts and disbursements can be compared to the bank statement to see if the records agree with each other. The process of reconciliation confirms that the amount leaving the account is spent properly and that the two are balanced at the end of the accounting period.
But the digitization adjusted cash book of the accounting processes, including account reconciliation and financial close, requires strong back-end data management policies and infrastructure. As the end of the month approaches, accountants’ can often be found buried deep in financial books and countless receipts and invoices. This is because they are busy reconciling financial records to check for any errors or anomalies in the company’s financial entries.
It looks at the cash account or bank statement to identify any irregularity, balance sheet errors, or fraudulent activity. Account reconciliation is an internal control system that certifies the accuracy and integrity of a business’ financial processes. It’s important to perform timely reconciliations so companies can close the accounts easily at the end of the fiscal year.
