Account Reconciliation – Overview, Process and Softwares

Account Reconciliation is the procedure through which accountants compare two records and check if they tally or not. It is a magnificent process because it helps us keep track of whether the records are consistent, accurate, and complete. It also confirms that the amount leaving the account is the same as what is spent.

Companies use account reconciliations for preventing balance sheet errors on their financial accounts. It is also used for checking fraud and reconciling the general ledger.

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What is Account Reconciliation?

Definition: Account reconciliation is defined as a process of comparing two sets of records used to ensure that the figures are accurate, complete, consistent, and in agreement. As an example, you can consider the record of the bank statement and the cash book. The entries in both of them should be the same, but if there is any difference, it indicates theft.

Account reconciliations are primarily used for clarifying the difference between two financial records or account balances. Businesses and individuals opt to reconcile their records on a daily, monthly, or annual basis to manage financial records, account balances, accounts receivable, account balance, accounting process, statement balance, etc by using accounting software for reconciliation.

Why do we need Account Reconciliation?

When you reconcile your accounts, you will have internal control for detecting any mistakes, frauds, or discrepancies in your accounting books that could negatively affect a company’s financial health.

As already stated, reconciliation is essential to keep track of records’ accuracy and check for any mishap. Also, there are some accounts whose balances are used in the coming years too. Thus it becomes crucial to cross-check the records for these. Reconciliation is a significant step of the closing process. It is imperative and ensures the integrity of the financial statements of a company.

What is the Account Reconciliation Process all about?

There is no such standard procedure for reconciliation. Probably that is why it isn’t taught in accounting classes. But some general principles are accepted by accountants worldwide. Double Entry Accounting is the most popularly used tool for this purpose.

Double Entry accounting involves posting every financial transaction in two accounts. These are the credit and the debit account. For example, during a company’s sales, the received accounts are debited in the balance sheet, while the sales revenue is credited on the income statement. In this method, the debits and credits should balance out each other and thus become zero.

But, this is not the only method. Another method of reconciliation is through account conversion methods. This is similar to personal accounting reconciliations wherein receipts are compared to entries.

Types of Account Reconciliation

Well, there is no such hard and fast rule to categorize reconciliation. Here, we would categorize them in terms of the purpose of reconciling- Personal and business reconciliation.

1. Personal Reconciliation

It is a common practice to reconcile the checkbooks and other account details with their own maintained checks, debit card, credit card, or other accounts. This helps them realize whether their money is safe with the bank or if there could be any sign of fraud. It also makes the person sure of the financial institution he has tied up with and handed over his money.

2. Business Reconciliation

Companies also practice account reconciliation to prevent fraud and balance sheet mistakes and maintain their records clean of any fraudulent behavior. They generally take up reconciliation at the end of every month, after the “closing of the books” for the previous month.

It is imperative for companies to maintain their general ledger appropriately and to adjust any incorrect entries accordingly. This helps them keep a record of their transactions correctly and helps them avoid the negative attention of the auditors.

Reasons behind Reconciliation Discrepancies

Although you can guess what might be the reason for most discrepancies, we list down four significant reasons for differences in the documents.

1. Timing differences

This was a significant reason behind discrepancies a few decades ago. Back then, paper checks were the primary payment method. But, today, with real-time communication of transactions, the delay between money being debited and credited from one account to another has significantly reduced from days or weeks to even minutes or hours.

2. Mistakes

To err is human. Exchanging digits or maybe transacting into wrong accounts is a mistake that anyone can make. Not from only the user’s side, but even banks can commit mistakes. Maybe any spreadsheet error or any other bank error. Well, mistakes are bound to happen, if not today, then any other day. In this situation, reconciliation is a savior. If you keep reconciling your accounts regularly, You’ll not lose much to these mistakes.

3. Missing transactions

You might have the best and the most experienced accounting team. But sometimes it just slips, and the transaction is lost in time and under the documents. Well, reconciliation is your savior at that time.

4. Fraud

It’s an open secret that many companies and owners are highly involved in frauds, and these often keep them up at night. While some of them are clever at making inappropriate things seem appropriate, many find it challenging to handle them. A regular auditing system by a third party should be put in place for such cases. Attention paid to the details in the records and regular review of reconciliations can help to catch such frauds easily.

Process of Account Reconciliation

While Account Reconciliation is a significant thing for maintaining various records, it is not at all an easy task to carry out. You might be thinking that it would take hours or maybe even days to do such a tedious task, and that too might be erroneous if carried out manually.

Well, yes, it is a very long process, even if your accountant is a pro at it. For small businesses with lesser transactions, it might not be that big a challenge. But, for a dynamic organization with a large number of transactions daily, it is. Thus, it is impossible to do the work manually. And this is where technology comes into play.

There is some software developed for this task that makes use of Artificial Intelligence to do the task efficiently and in a short time. Let us now have a look at the five key steps that will help you in your need to reconcile accounts-

• You should compare your internal account register to your bank statement
• You need to check that all outgoing funds have been reflected in both your internal records and your bank account
• In the next step, you should check that all incoming funds have been reflected in both your internal records and your bank account
• You should check for bank errors
• You need to make sure the balances are accurate

List of Account Reconciliation Software

1. BlackLine

BlackLine is a reconciliation tool that offers a cloud financial close solution to channelize continuous improvement across your finance and accounting procedures. It offers an accurate and effective account reconciliation process that assists in producing correct and high-quality financial statements.

2. Xero

It is one of the best online accounting tools for small businesses that is popular for its ease of use. It will help you see your cash flow in real-time via online billing, accounting, and banking. It helps small businesses connect with their advisors.

3. OneStream

With OneStream, you will have corporate performance management software that assists in helping businesses alleviate their financial consolidation, reporting, planning, analysis, and data quality. It is a CPM solution that can be used in all the different areas of your business.

4. CashMatching

As one of the most useful tools for account reconciliations, CashMatching assists in automating the reconciliation of all entries like bank entries, accounting entries, etc. This tool is quite useful in maximizing the automatic reconciliation rate.

5. Cashbook

Cashbook is useful in connecting bank accounts with ERP software with the help of cash application automation, bank reconciliation automation, and accounts payable automation. This reconciliation software will assist you in allocating resources to value add functions, match records between your ERP and bank accounts as well as automate repetitive AP transactions.

Wrapping Up!

Account Reconciliation is a necessary process required to maintain your records and check for any error or fraud that might have happened while recording your transactions.

It is recommended that the reconciliation is done using one record made by you and the other maintained by any third party for more clarity on various issues.