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 and generate individual ledgers. The closing ratio in the accounting ledgers is calculated by reconciling the accounts with other reports and paperwork.
What is Reconciling Account?
Ensuring that the transactions in a company’s financial records are accurate with impartial third assessments is done via the accounting procedure of reconciling an account. Reconciliation verifies that the reported amount leaving an account matches the amount spent and that the balance of the two accounts after the reporting period is the same.
To explain the differences between two financial records, such as the financial statements and cash book, accountants employ reconciliation. Any discrepancies between the two data sets that cannot be explained might be evidence of theft or financial expropriation.
Since their balances are carried over yearly, asset, debt, and equity accounts need reconciliation. Reconciliation involves comparing the transactions in an internal record-keeping account to a monthly statement from an outside source, such as a bank or credit card company. Any inconsistencies must be justified in the account reconciliation statement. The balances in the two records must match up.
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 an explanation.
Why should you Reconcile your Account?
For every business, account reconciliation is a crucial activity. Ensuring that the reported balances of your firm and the bank are in agreement is the primary objective of bank statement reconciliation for small companies. It also helps in managing and keeping track of your financial flow.
Additional justifications for companies reconciling their accounts each month include the following:
To recognize fraud:
When reviewing the activities in your bank account, you should start by looking for signs of fraud. For instance, were valid checks you issued copied or altered? Were checks written without permission? Have there been any unlawful withdrawals from the account? Are there any undeposited funds in the account?
To check data entry:
You may spot any anomalies by reconciling your bank statements. This involves inputting incorrect numbers, making duplicate entries, and making other data entry mistakes.
To verify the truthfulness of the accounting records:
Banks may err, although it’s uncommon. One approach to ensure that your financial statement and your bank’s statement line up is to reconcile your bank statements.
For efficient tax reporting:
You must reconcile your bank accounts to produce an accurate tax return.
To prevent theft:
Keeping your bank statements in line may help stop workers and other individuals from stealing from your business.
Reconciling account statements may generally assist you in finding any odd transactions that could be the result of fraud or accounting mistakes. Both officially and informally might be used in this procedure.
Both corporations and private persons should independently check each transaction. This makes sure that the quantities are exactly in line.
To save costs:
Reconciling your account will help you to save costs efficiently.
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 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 flows 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 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 activity levels. 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 a company does not expect to pay. The expected bad debts are determined using the historical activity levels of the bad debts allowance.
What does Reconciling an Account Involve?
The majority of firms use application software 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 the 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 initiatives 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 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. Even though 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, all the documents’ amounts should be identical. You must create a cash flow statement to clarify the disparity between the organization’s corporate data and the bank balance.
Pros & Cons of Reconciling an Account
Some pros & cons of reconciling an account include:
|Reduces accounting errors||It may produce checks that, after being cancelled, pass through the bank.|
|Safeguards business deposits||It may issue un-cleared checks that persist not to be shown.|
|Simplifies paying payments||It opens the door for the return of deposited checks.|
|It is cost-effective.||The possibility of missing transactions exists.|
|Help in the investigation of nefarious transactions|
|It accomplishes precise balancing.|
|It ensures detailed tax reporting.|
|It promotes collection tracking.|
Role of an Accountant in Reconciliation
The Role of an accountant in reconciliation includes:
- Verifies the accuracy of bank reconciliations and accounts on the fiscal balance sheet.
- Verifies that applicable laws make deductions.
- Practice and control reporting.
- Points out and identifies instances of systemic issues and inadequacies.
Types of Bank Accounts That Can Be Reconciled
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.
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.
A key accounting procedure called reconciliation ensures that the actual amount spent or earned reflects the amount leaving or arriving in an account after a fiscal period.
Due to the chance to look for fraudulent behaviour and avoid financial statement problems, reconciling the accounts is an especially crucial task for enterprises and individuals. As part of standard accounting practices, reconciliation is often performed consistently, such as once a month or every three months. The above tips will also aid you in this.
I am Lavinia by name and a financial expert with 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.