A reconciliation is the method of matching internal financial documents with account statements from foreign sources (either a bank, credit card company, or other financial organization) to ensure that they are in agreement. Understanding how to effectively reconcile your finances is critical for your company’s financial sustainability, as it assists in the detection of any mistakes, inconsistencies, or fraud.
These financial transactions should be displayed on your paper checking account, financial records, and bank records if you don’t use an accounting system. Your transactions will be logged in your accounting software’s account registry if you use it to issue quantities of checks every time the business settles payments.
A Reconciliation’s Explanation and Illustrations
Whenever you balance finances, you verify for discrepancies and put multiple streams of a business’s accounting into alignment.
If you manage a small retail business, for instance, you might use a point-of-sale ledger or comparable software to keep track of everyday activities, stock, and in-store accounts. You’ll also have a separate bank account that keeps track of your transfers, transactions, and long-term holdings. If you make a comparison, you can check for any cash flow differences over a specific time period.
TIP: Account reconciliation is often made easier by using double-entry accounting. This entails maintaining two different accounts: one for deposits, which monitors cash flowing in, and one for credits, which also monitors money leaving the account.
Independent auditors may sanction publicly owned corporations if their finances are not properly reconciled. Several businesses have mechanisms in place to keep track of payment documents, bank statements, and other information that is required to record and verify an account reconciliation report.
Account Reconciliation: How Does It Work?
Whenever you reconcile accounts with the accounting system, the operating system does the bulk of the housework for you, sparing you a lot of effort and time. Nevertheless, specific transactions that may have never reached the accounting system, including cash stolen from a petty cash box, require human intervention. These measures will assist you in ensuring that all of your funds are properly accounted for.
Side-by-Side Comparison of the Two Records
Comparing your internal account registry to your financial statements is the first stage in preparation for a full account reconciliation. Mark it off for every transaction and transfer that corresponds to the statements in your registry. Produce a checklist of any occurrences on your financial statements for which you have no other proof, including a payment receipt or a check slip.
Examine Your Outgoing Funds
Verify that all outgoing funds have been accounted for in your internal records as well as your bank account. Deduct these things from the bank reconciliation amount, whether they are paychecks, ATM activities, or other costs. Make a note of any expenditures on your financial statements that you haven’t entered into your internal accounting system. Resolved checks, domestically documented auto-payments which haven’t processed the checking account, check-printing charges, ATM service charges, and other bank charges like insufficient funds (NSF), overdraft charges, or over-limit service charges are all things to keep an eye on.
Incoming Funds should be checked
Verify that all inbound funds have already been accounted for in your internal documents as well as in your banking account. Identify any transactions or account credits that the bank hasn’t yet recognized and add them to the balance on the statement. Start making the adjustments if the bank indicates money deposits that aren’t represented in your internal records. If you’re reconciling just several weeks after the date specified on an interest-bearing account, you might have to include interest as well.
Examine for Bank Irregularities
Bank inconsistencies are uncommon, but when they do, the sufficient quantity should be adjusted or deducted from your total balance, and you must notify the bank immediately to report the problem.
Make certain the numbers are correct.
The balance on your financial statements must now match the sum in your accounts. Dependent on the number of inconsistencies, you may need to prepare a supplementary schedule that outlines the disparities between your internal records and banking information.
Essential: GAAP refers to “Generally Accepted Accounting Principles,” and it establishes specific regulations and processes, including account reconciliation, that corporations must adhere to in order to demonstrate that their accounts are healthy.
Account Reconciliation’s Advantages
Evaluating financial transactions is crucial because it helps minimize overdrafts on financial statements, detects fraudulent or overpriced credit card purchases, clarifies timing inconsistencies, and reveals other negative activities like theft or erroneously documented revenue and spending entries. This keeps transactions error-free and helps uncover inappropriate expenditure and problems like embezzlement before they spiral out of bounds, saving your organization money on overdraft charges.
Your accountant will be able to provide dependable, precise, and high-quality financial information by balancing finances and evaluating transactions. Because your business’s balance sheet includes all money spent-whether in cash, credits, or loans-and all assets acquired with those funds, the correctness of the balance sheet is heavily reliant on proper financial account reconciliation.
Important Points to Remember
For organizations of all sorts, reconciliation is a critical step in maintaining accurate financial documents.
Account reconciliation can aid in the detection of defects, fraud, theft, and other illegal activities, saving you money and keeping you out of legal jeopardy in the long term.
Account reconciliation may appear difficult, but technology may assist you in becoming more structured, and adopting a simple set of procedures can make the system go more smoothly.
Most Commonly Asked Questions
Is it possible to hire someone to balance my accounting for me?
Certainly, there are a variety of professionals who can help with this, the most prominent of which is an accountant. If you employ somebody to assist you, make sure they adhere GAAP or have qualifications and competence you can trust. Nevertheless, if you opt to take on the project on your own, you will be able to save a significant amount of money. Reconciling your own finances can also be a good learning opportunity if your company is tiny and you’re just getting started.
Is it possible to use reconciliation to help me with my taxes?
While reconciling your accounts won’t automatically result in a reimbursement, following through the process of evaluating your financial documents can be quite helpful in identifying company costs that may be deducted on your tax return.