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What is reconciliation in accounting?

Whatever type of business you work in, reconciliation plays a key role in the work of the accounts department. It means the company’s finances stay as up-to-date and accurate as possible, with a set of checks that is performed regularly. Here we explain exactly what reconciliation in accounting is and why it is so important.
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In accounting, reconciliation is the process of comparing two pieces of data – usually one created internally by the company and one provided externally by a bank or another key third party.

Traditionally, this process was carried out in an analogue format, using multiple pieces of paper and a calculator, but the rapid rise of cloud accounting software has meant that much of the process can be automated. You can even get specially designed bank reconciliation software to make reconciliation as straightforward as possible.

Why is reconciliation accounting important?

The aim of the process is to ensure that the two pieces of data match, meaning that the business’s financial records are accurate and consistent.

Other reasons we prepare reconciliation accounts include: 

  • Maintaining good relationships with suppliers through consistent and punctual payments.
  • Avoiding penalties for overdue payments
  • Helping to prevent overspending and managing budgets
  • These are just a few of the advantages of bank reconciliation statements.

How does account reconciliation work?

The process of account reconciliation usually takes place towards the end of the financial period. Accounting reconciliation involves verifying that balance sheets and other financial information is accurate. If discrepancies are raised, accountants are able to investigate further and proactively correct data to ensure bank records and internal reports are aligned.

What are the types of reconciliation?  

Although bank reconciliation is the most common form of reconciliation, you may find that there are other types which are necessary for your business.

Bank reconciliation

This involves comparing the monthly, or daily (depending on the size and nature of your business) balances in your company records and bank account to make sure that the two match. There are a number of reasons for discrepancies, but any irregularity could be a sign of fraud and should be investigated.

Vendor reconciliation  

This involves comparing the balance on statements provided by suppliers with the company’s payable ledger. Not all suppliers will provide statements without being asked, so it may be necessary to request them in order to accurately carry out vendor reconciliation.

Customer reconciliation  

This is necessary for companies which enter into credit agreements with their customers. By checking the company’s accounts receivable ledger against all recorded invoices and payments, you can stay on top of incoming transactions and chase any outstanding funds if necessary.

Intercompany reconciliation  

This is only relevant to your company if it is part of a wider group of companies, where money regularly moves in between them. It involves comparing balances between companies to make sure that the parent company has accurate and consolidated accounting records.

Business-specific reconciliation  

This depends on the nature of your business and what it does, but examples of business-specific reconciliation include performing stock takes to make sure that the physical inventory value matches that which is listed in the balance sheet, or checking expenditure against expenses reports for field sales representatives.

What are the benefits of a bank reconciliation?  

There are several reasons why a bank reconciliation is a critical part of your company’s accounting process – and why it’s worth considering automated bank reconciliation software to make the process more manageable.

  • It detects accounting errors. These may be common errors – such as double payments, missed payments or even simple miscalculations – but any error should be investigated and the cause identified. Reconciliation allows you to identify and catalogue these errors as soon as possible after they occur.
  • It prevents theft. Any unexplained discrepancy in a bank reconciliation could be a sign of theft or fraud. If there is a transaction present in the company records but not in the bank balance, an unauthorised person may have been taking money from the company account. The sooner a problem like this is spotted, the more the damage to the company can be kept to a minimum.
  • It tracks transactions and receivables. Keeping on top of these with the pinpoint accuracy that a bank reconciliation provides saves time further down the line. By not waiting for discrepancies to occur, but actively looking to identify them, the whole process is kept smoother.
  • It achieves an accurate balance. Having a close eye on your company’s real-time account balance reduces the chances of overspending or overdrawing and having to pay bank charges.

What are the challenges of reconciliation accounting?

There are a few challenges that can be faced during account reconciliation which are reflected in inaccurate, or mismatched financial records. 

Timing differences can often cause red flags. If a payment is made using a cheque, it’s likely to immediately be recorded on the business’s balance sheet. However, if it hasn’t cleared the bank, it may not be reflected in a bank statement. 

Another issue that can cause discrepancies is input errors that skew final totals, or missing transactions that were not recorded in the right documents - this is a big challenge in managing multiple financial documents. 

Why should you use automated bank reconciliation software?  

Bank reconciliation is a simple idea but a complex process. It involves combing through a lot of detail and any software which can help make the process more straightforward and accurate can make a real difference to your business. Visit our website to learn about the benefits of an integrated accounting system.

No two companies are the same, and the types of reconciliation that will need to be performed – as well as the specifics of what to look for – will differ from business to business. It’s worth knowing exactly what to consider before implementing bank reconciliation software.