To understand how account reconciliation is important in accounting, you need to first understand what reconciliation is. Reconciliation is a basic accounting process which helps you make sure the amount a business spends or earns can match with the amount of money which enters or leaves the business’s account when a fiscal period is up. This helps business owners and individuals check if there are any signs of fraudulent activity, and also helps to prevent mistakes in the business’s financial statement. Reconciliation must be done regularly, and is usually done quarterly or monthly. This is a part of regular accounting procedures. Although it can get confusing, there are professional services like bookkeeping services that can help make this entire process easier.
There are two main ways of reconciliation. This includes analytics review and documentation review.
How Does Reconciliation Work?
In every business, it is important to reinforce the constant reconciliation of an account, be it every fiscal month or every quarter. In the process of reconciling an account, individuals and businesses need to verify that the account balance is correct- every transaction should be summed and should equal to the ending account balance. You can reconcile an account in two ways- reviewing analytics and reviewing documents.
With the process of documentation review, the finance team will be able to compare the amount coming in or going out of an account with each transaction. To make things clearer, here is an example. Imagine an individual retains all receipts made by their credit card, but they notice certain charges on the credit card’s bill that they did not make. The charges may not be significant, and this person may just ignore it and think that it might be a small expense, such as a lunch expense. However, when the month comes to an end, the account holder looks over the transactions made through records on the credit card bill. The account holder notices that there are some small expenses that has no receipts. As the individual has been responsible and holding on to the receipts, they call the bank to check the amounts. After further investigation, they discover that a criminal has taken the credit card information through hacking into the company’s information. The individual can then be re-imbursed for the amount loss. Fraudulent activity will then come to an end when the card gets cancelled.
This is how documentation review can help with reconciliation of an account.
The second method is analytics review, which can also bring balance sheet errors or fraudulent activity to light. With this method, businesses will estimate the amount that should exist in the accounts. This is done through using previous activity levels as a guideline.
Here is an example. For instance, a company buys over 5 buildings every fiscal year, according to past years’ activity levels. Every year, this company goes through account reconciliation to ensure that the amount is right and there are no mistakes. However, it appears that the amount this year is off significantly. Actual accounts payable is at $50 million when the estimate is at $7 million. The accountant will then proceed to review the balance sheet and rectify any errors, such as an extra zero added due to the bookkeeper’s mistake.
Account reconciliation can be complicated and difficult, especially if you are dealing with large numbers. Fortunately, the advancement of technology means that there is software available to help simplify this entire process. Feel free to contact Fourlane to find out more about the products and services we offer that can help make your finance team’s life easier, thus saving time and reducing errors.