What does reconciling an account involve? This is a question that a lot of people nowadays ask. As a result, we’ve written this post to assist you. Account Reconciling ensures that the account’s closing balance is accurate. The standard accounting procedure is to transmit diary entries first, then generate individual ledgers. The closing ratio in the accounting ledgers is calculated by reconciling the accounts with other reports and paperwork.
What Does Reconciling an Account Involve?
Reconciling an account is an administrative procedure that ensures that company financial data operations match independent third-party reporting. According to reconciliation, the amount reported after an account matches the amount spent, and the two accounts are equal after the reporting period.
Accountants are in charge of checking financial statements for correctness and compliance with relevant laws and regulations. Handling tax-related duties such as computing numbers to explain the discrepancy between financial information, such as the bank statement and payment vouchers is included.
Any differences between the two documents that aren’t presented might indicate money embezzlement or theft. Account reconciliation is required because the balances of asset, liability and equity accounts are carried forward each year.
During reconciliation, you should compare the activities entered in an internal record-keeping account to an external monthly report from suppliers such as banks and credit card providers. The two records’ balances must be in sync with one another. Any anomalies in the account reconciliation statement should also need explanation.
Methods for Reconciling an Account
The following are the two major procedures for balancing an account:
Paperwork review is by far the most common method of reconciliations. It requires gathering bank details from reports and evaluating the transaction’s acceptability.
The verification approach checks to see whether the amount reported in the account matches the actual cost in the company’s books. For instance, a company may maintain track of all purchase receipts to verify that revenue is flowing to the right locations.
The auditor noticed that the business had been billed five times for a trade that was not on the financial report at the season’s end-of-month reconciling. The accountants called the bank to learn much more about strange transactions.
The bank refunded the business for the erroneous charges once the bizarre deal was revealed to be a misunderstanding. Once the bank mistakes are addressed, the bank statement worth and the cash book total are matched.
In the analytics review technique, the funds are adjusted using estimates of prior account levels of activity. It comprises forecasting the total sum in the account based on account activity levels or previous data.
The approach identifies whether the discrepancy is due to a balance sheet error or theft. For example, a company may calculate the amount of expected toxic debt in the collections account to see if it’s close to the balance in the buffer for dubious accounts.
The receivable is a counter-asset account related to accounts payable that attempts to reflect the true value of such accounts. The graph represents the number of receivable accounts that a company does not expect to be paid. The expected bad debts are determined using the historical activity levels of the bad debts allowance.
What does Reconciling an Account Involve?
Application software is used by the majority of firms for reconciling. For single sole proprietors to start-ups and small (SMEs), this is usually the most premium way to keep track of transactions.
It also helps you reconcile any differences between your bank statement and your cash book. On the other hand, Unification may demand human involvement to permit transactions that have been recorded improperly.
It’s on top of the initiatives that were neglected or caused by bank blunders. The following is a stage process guide to reconciling your account:
Analyzing the bank and cashbook statements
First, cross-reference all ledger accounts activities with matching bank account activities. Make a record of any transactions in your bank statement that aren’t supported by documentation, such as a payment receipt.
Make a record of any fees paid in the capital account that do not appear as payments on the checking account statement.
Transactions such as checks and ATM withdrawals are examples of potential transactions. The transactions must be deducted from the bank document’s balance. It’s also a good idea to keep track of transactions that show on your bank account but don’t appear in your cash book. Check publishing charges, borrowings, unbuilt checks, and other activities may be impacted by ATM service charges.
Look for purchases in the cash book as well as the credit card.
Locate and add any automatic payments and account credits that occur in the cash account and not on the financial statements to the bank statement total; similarly, if donations show on the financial statements but not in the capital account, include the additions to the cash balance in the account.
Check your bank report for any inconsistencies.
When a check or deposit is deducted or allocated to the incorrect account on financial statements, it is called a bank error. Despite the fact that bank errors are rare, the business should contact the bank as quickly as possible to notify the issues.
The change will be reflected in a future bank statement. The discrepancy, however, must be reconciled in the next period’s account balances.
Check to see whether the balances are equal.
After finding documentation for any discrepancies between the bank cash flow statement book, the amounts in all the documents ought to be identical. To clarify the disparity between the organization’s corporate data and the bank balance, you must create a cash flow statement.
Benefits of Account Reconciliation
The following are some of the advantages of account reconciliation:
Eliminates accounting mistakes
With the monthly accounts reconciliation procedure, catching faults or blunders made by your accounting staff becomes simple. It reveals the nitty-gritty of the accounts and, as a result, provides you with a clearer and better perspective of your accounts book.
Protects company deposits
You may notice an amount deposit mistake due to human error when reconciling your accounts. However, such unpleasant scenarios as a shortage of cash while dealing with other firms may be absent if the appropriate amount of attention is paid to the accounts book and a suitable technique of account reconciliation is followed throughout the month.
Makes paying bills easier
Because of their hectic schedules, company owners often fail to pay their expenses at the end of the month. Most businesses choose to have their bills automatically taken from their accounts to avoid this.
Though it may make their bill-paying procedure easier, it may occasionally result in an overdraft or a missed payment. The implementation of account reconciliation seems to be a fantastic alternative in a wave of such instances. It protects your accounts from being overdraft or defrauded by your accounting department.
It is cost-effective.
This is one of the most eye-catching features that never go ignored since everyone is looking for new methods to manage and save money, mainly while operating a company.
You may be unaware of the many types of bank charges or fees taken from your account without your knowledge. We believe we have no choice but to pay these ‘bank fees’ since they are recognized as such.
However, it is essential to be aware of the specifics of such bank fees, which may be determined via the account reconciliation procedure. It also informs you of the specifics of additional tax deductions, which may be cancelled if they are no longer required. Thus, you will be able to get a set amount of money back into your account.
Assist in the investigation of unlawful transactions
Lack of care for your accounts might lead to illegal or undesired transactions by your workers, suppliers, or other persons involved in account administration.
Sometimes it’s your loyal workers who carry out personal dealings in the company’s name and at the company’s cost. Account reconciliation may help you prevent problems like these.
Frequently Asked Questions
What does reconciling an account involve?
Account reconciliation compares your financial records to a financial statement obtained from another source, such as a bank or credit bank. The financial records are compared to guarantee there is no discrepancy or fraud. To put it another way, comparing the two versions will allow you to discover any fraud or mistakes committed by the bank.
Is it worthwhile to reconcile your accounts?
Yes. Because of the benefits it delivers, account reconciliation is worthwhile.
What types of account reconciliation are there?
The types of account reconciliation include:
Reconciliation of bank accounts
Here, you reconcile the internally generated cash book with the bank statement to ensure that the financial transactions are accurately entered without mistakes.
Creditors account reconciliation
Here, you methodically tally all the exchanges under accounts payable with declarations received from debt holders.
Defaulters account reconciliation
This step involves adding up all the debtors’ statements and reconciling any differences.
What are the benefits of account reconciliation?
The benefits of account reconciliation include:
- Eliminates accounting mistakes
- Protects company deposits
- Makes paying bills easier
- It is cost-effective.
- Assist in the investigation of unlawful transactions
In conclusion, reconciling an account comes with various merits. And if you desire more help in this regard, the above highlights what reconciling an account will aid you immensely.
I am Lavinia by name and a financial expert with having a degree in finance from the University of Chicago. In my blog, I help people to educate by making wise choices regarding personal investment, basic banking, credit and debit card, business education, real estate, insurance, expenditures, etc.