Account Reconciliation: What is It and Why is It Important?

 

Account reconciliation is the first step in the financial close process of organizations. Financial teams conduct account reconciliations at the end of each fiscal year. The process gives them the confidence that the general ledger accounts balance is accurate, complete, and free from discrepancies and errors.

General ledger account balances are compared to independent systems, documentation, and third-party data to balance and support the stated finances and meet compliance regulations effectively.  

The account reconciliation process differs from one business to another. But most companies use the double-entry accounting method required by generally accepted accounting principles (GAAP).

Small business owners need to keep a record of daily transactions, expenses, balances, and inventory. Public companies are also compelled to keep consistent reconciled accounts to avoid the risk of penalties.

Accounts are usually reconciled in two ways: reviewing documents and reviewing analytics, both of which help highlight fraudulent activities and balance sheet errors. The former requires the finance team to compare incoming and outgoing transactions from an account. Meanwhile, the latter involves using previous activity levels to estimate the amount that should be available in the accounts.

Dealing with such large numbers while ensuring compliance can be complicated. Fortunately, you can simplify life by hiring a bookkeeper from Alpha Bookkeeping to make your finance team's life easier.

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Different Aspects of Account Reconciliation

#1- Bank Reconciliation

This refers to the process where an organization compares its bank account balance as reported in the books to the bank statements from a financial institution. Companies usually perform this type of reconciliation often to ensure document consistency.  

#2- Customer Reconciliation

Companies can compare the outstanding customer balances to the general ledger accounts receivable section to discover any anomalies. The reconciliation is usually performed before companies issue their monthly financial statements. This document serves as proof that there isn't any material inaccuracy in the ledgers.  

#3- Vendor Reconciliation

Businesses can compare the accounts payable recorded in the books with the balance provided in the vendor's documentation. It helps ensure no discrepancies between the received goods and the amount charged by a vendor.

Reasons Why Account Reconciliation Is Essential

Businesses would have a tough time identifying and preventing fraud, theft, and errors that could raise concerns during audits in the absence of proper account reconciliation. While the process can be performed as often as you want, most prefer to reconcile accounts on a monthly basis following the financial close.

This helps them eliminate potential errors and spot unauthorized transactions. You can keep track of spending in each cycle and project future expenses. With the correct information, you can also ensure no deposits are missed, or no account is overdraft mistakenly due to a lack of funds.

Catching blunders and errors on time can help you correct the transactions to get a clearer and more comprehensive vision of the books. It's also a great way to find out whether things like taxes and hidden bank fee is causing the balance sheet to mismatch or if someone in the finance team has been cheating and misusing their authority.  

Amy at Alpha Bookkeeping can support your finance team to make it easier for you to reach your organizational goals. Book a consultation to learn how the bookkeeping firm can help you, whether you need bookkeeping clean-up, catchup, or monthly bookkeeping services in Sacramento.