The importance of account reconciliations
Adam Zoucha
Account reconciliations. Doesn’t sound like fun, right?
But it’s one of the most crucial tasks you need to perform to keep your business running.
It’s easy to fall into the trap of thinking that you’ll just put information from your financial statements into your accounting software, and it’ll do all the work. Wrong.
Why? Because there are reconciling items – like checks you wrote that haven’t been cashed yet. They are in your accounting records but haven’t been logged by the bank.
When done correctly, account reconciliation can save you possible headaches and pitfalls down the road.
What is an account reconciliation?
In the simplest of terms, account reconciliation is examining your internal financial records against monthly statements from your bank or credit card company. Ensuring that all transactions are legitimate and documented is the goal.
It’s about comparing different sets of transactions to make sure they match. And it helps you catch any issues with your accounts like bank errors or fraud.
And account reconciliations are limited to cash accounts. Most of your company’s balance sheet accounts should be reconciled monthly or quarterly.
When you compare your ledger and external account, you’re checking for discrepancies for a specific time frame. Instead of waiting until year-end or tax time, it’ll help you spot entries that don’t match up and correct them now.
And when your books are clean:
- It’s easier to find financing
- Your business will run more smoothly
- You’ll have peace of mind
How does a reconciliation work?
These days, accounting software handles much of the account reconciliation process and saves you a good deal of time.
However, you still need to check on manual processes to capture transactions – like cash stolen from a petty cash box – that may have been omitted from the accounting system. This way, you’re always on top of your record keeping.
Here’s a general overview of what the process looks like for a bank account:
- Examine and check off each item on your register that matches your statement.
- Note all transactions that don’t appear on either your ledger or statement.
- Investigate the mismatched transactions. These are also known as reconciling items. It could be that it’s a monthly bank fee on your statement that you’ve not recorded on your books.
- Add transactions that appear on your statement and that you’ve verified to your ledger.
- Add or subtract verified transactions on your ledger from your statement balance.
- Identify errors and, if necessary, contact your bank immediately to report them so that they’re added or subtracted from your account.
- Check that your balances are accurate and equal in both your account and internal records. Have a supporting schedule that shows your reconciling items so you can follow up on them next month.
At the bare minimum, you should reconcile your accounts once a month. If you’re in a high activity period or have many unusual expenses, you can do it weekly.
And for low activity accounts, like fixed assets, quarterly or semi-annual reconciliations are adequate.
Why account reconciliation is essential for your business
Here are some reasons why you should take time to reconcile your accounts regularly.
Detect errors
You can’t avoid errors entirely. They can happen with your bank or on your end.
Account reconciliation helps you catch any discrepancies and find accurate entries or those that you need to address.
Be ready for tax season
When preparing for tax season, you need error-free records to avoid under or over-reporting your earnings. Otherwise, you risk exposing yourself to all sorts of extra hassles, including penalties and other fees.
Account reconciliation also helps you avoid the extra hours of going through months-old records at tax time.
You can enjoy the peace of mind knowing your business is tax-ready and use that time to focus on other parts of your business.
Identify fraud
For many businesses, fraud is one of the top payment-related challenges. By reconciling your accounts, you can:
- Identify fraud before it spirals out of control
- Save money
- Avoid further complications down the line
For instance, your account reconciliation allows you to catch unauthorized or unfamiliar transactions if your credit card number was stolen. You can then alert your bank and shut your account before the fraudulent charges pile up.
Improve business operations
If you regularly find discrepancies before anything gets out of hand, you get more opportunities to run your business more effectively.
Account reconciliation helps you avoid making errors so you can be confident in your records and run your processes more smoothly.
Catch billing errors
Nobody is perfect, and that includes your vendors. They can misapply a payment you made, double charge for an item or service, or bill for stuff they didn’t deliver.
Reconciling vendor invoices regularly allows you to catch billing mistakes quickly. This way, you can address the errors before they add up and prevent frustration for you and your vendor.
Catch mistakes with record keeping
Whether you reconcile accounts manually or use software, it’s easy to make mistakes during data entry. The software may also make mistakes when auto-importing the deposits or transactions.
Account reconciliation helps catch those mistakes and keeps you from accidentally overdrawing your account.
Wrapping up
Whatever your cadence, make account reconciliation a regular business practice so you can protect your business.
About the author:
Adam Zoucha is a CPA-certified dual US/British citizen serving as Managing Director of EMEA for FloQast. He heads a team responsible for all client activity in all of Europe, the Middle East, and Africa.
Prior to joining FloQast, Adam worked in the audit practice at Deloitte and Touche in San Francisco, auditing both private and public clients and seeing the inter-workings of accounting departments meeting deadlines for SOX compliance and internal management. Adam holds a Bachelor’s Degree in Business Entrepreneurship and a Master’s Degree in Accounting from University of Southern California.
