Account reconciliation is the matching and validating of balances in the general ledger (GL) to internal and external sources or other independent calculations to accurately close month-ends and year-ends. Data sources used to reconcile and compensate account balances include sub-ledgers for HR and fixed assets, bank statements and schedules of payable and receivable accounts. For both internal and external sources, each balance has to match the corresponding account in the general ledger. Inter-company transactions, currency exchange rates and various non-cash activities only complicate things in an already complex, time-consuming process. Due to the inefficiencies and error proneness of account reconciliation through traditional processes, finance teams should automate through new technologies in the industry.
Defining Account Reconciliation
The basic steps involved in reconciliation transactions include the following:
1. Identify payments recorded in the internal cash register and not in the bank statement (and vice-versa):
Some transactions can be recorded as paid in the internal cash register, but not recorded in the bank statement. The transactions should be deducted from the bank statement balance. An example of such a transaction is a check that has been issued but has yet to be cleared by the bank. A company may issue a check and record the transaction as a cash deduction in the cash register, but it may take some time before the check is presented to the bank. In such an instance, the transaction does not appear in the bank statement until the check has been presented and accepted by the bank.
Conversely, identify any charges appearing in the bank statement but that have not been captured in the internal cash register. Some of the possible charges include ATM transaction charges, check-printing fees, overdrafts, bank interest, etc. The charges have already been recorded by the bank, but the company does not know about them until the bank statement has been received.
2. Compare internal cash register to the bank statement:
The first step is to compare transactions in the internal register and the bank account to see if the payment and deposit transactions match in both records. Identify any transactions in the bank statement that are not backed up by any evidence.
3. Confirm record of cash receipts and deposits in the cash register and bank statement:
The company should ensure that any money coming into the company is recorded in both the cash register and bank statement. If there are receipts recorded in the internal register and missing in the bank statement, add the transactions to the bank statement. Consequently, any transactions recorded in the bank statement and missing in the cash register should be added to the register.
4. Watch out for bank errors:
It is possible to have certain transactions that have been recorded as paid in the internal cash register but that do not appear as paid in the bank statement. The transactions should be deducted from the bank statement balance. An example of such a transaction is a check that has been issued but has yet to be cleared by the bank.
The errors should be added, subtracted, or modified on the bank statement balance to reflect the right amount. Once the errors have been identified, the bank should be notified to correct the error on their end and generate an adjusted bank statement.
A quality account reconciliation process involves an audit trail, workflow automation and supporting information to ensure that all accounts balance out, as well as making the process transparent and clearly justified for everyone involved. In achieving these goals, proper account reconciliation does the following:
Demonstrates the organization’s financial integrity to internal and external stakeholders, i.e. accurate and transparent regulatory reporting
Provides real-time data to the accounting and finance teams to execute variance analysis and re-forecasting
Gives management a timely and accurate picture of last period’s performance
The Hindrance from Traditional Method Account Reconciliation
Internally, proper account reconciliation also provides process benefits, including close time reduction, consolidating and preparing financial statements for every reporting period, while improving and automating internal control measures. It’s also a process that can be dramatically improved through automation. Unfortunately, it is frequently done in a manual, time-intensive and error-prone manner. Without a proper, automated account reconciliation process, organizations may encounter a range of problems arising from large numbers of accounts and corporate entities, and the complexity of sub-ledgers and other systems involved.
Bottlenecks in the period-end are closed from unexplained exceptions (i.e. accounts requiring adjusting entries to balance out) that prevent timely and accurate identification, review and reconciliation. Fraudulent or negligent accounting practices that go undetected due to unreconciled accounts, poor internal controls or a lack of supporting documentation, commentary or calculations.
Account reconciliation is the bedrock of accurate, efficient, compliant and timely financial statement delivery. To provide a complete and accurate picture of a company’s financial performance, account reconciliation must be treated as a priority and critical path in the period-end close process. Finance teams must adopt some sort of method to improve accuracy, enhance efficiency, and ensure greater security in the account reconciliation process.
Adopting Superior Methods in 2021
If manually reviewing accounts and tracking down supporting documentation for exceptions weren’t time-consuming enough, most companies have month-end close and reconciliation workflows they follow to close out each period. Depending on the number and complexity of accounts, entities and the overall business, simply executing these tasks can be just as tedious as the reconciliation itself.
Automating the account reconciliation process enables rules, roles, checklists, and processes for review, reconciliation and approval to be defined once and repeated consistently. Once implemented, workflow automation eliminates essentially all manual effort, and automatically marks adjusting entries as complete and routing them to the appropriate colleague for approval before posting. Automatic notifications, real-time status reports, routing tasks to the right roles, and posting transactions to the GL when complete, all go even further to make the account reconciliation process more accurate, efficient and rewarding for those involved.
The primary method of automating account reconciliation is implementing financial software. Such systems include features with the ability to enhance your finance team’s efficiency and accuracy in executing account reconciliation, as they eliminate the time wasted on manual tasks and human error that is so common in the traditional methods.