Why Is Reconciliation Important in Accounting?

If you find any bank adjustments, record them in your personal records and adjust the balance accordingly. If you’ve been charged a fee in error, contact your bank to resolve the issue. Data automatically uploads into your Enterprise Resource program(ERP) system, making the reconciliation process virtually seamless.

When a business receives an invoice, it credits the amount of the invoice to accounts payable (on the balance sheet) and debits an expense (on the income statement) for the same amount. When the company pays the bill, it debits accounts payable and credits the cash account. With every transaction in the general ledger, the left (debit) and right (credit) sides of the journal entry should agree, reconciling to zero.

Fixed assets and accumulated depreciation

It adds proper controls and automation, imports data from any source, and is compatible with all major ERP systems. Upon further investigation, it is identified that the company recorded bank fees of $1,000 rather than $100. As such, a $900 error should be noted in the reconciliation and an adjusting journal entry should be recorded. Maximize working capital with the only unified platform for collecting cash, providing credit, and understanding cash flow. Transform your accounts receivable processes with intelligent AR automation that delivers value across your business.

Anytime something appears out of the ordinary, you’ll want to review the originating documents such as invoices entered to determine if they were posted properly and whether any adjustments need to be made. Reviewing your comparative trial balance is one of the most important things you can do for your business. Once car advertising statistics these adjustments are made to the general ledger, your bank account will now be reconciled with your general ledger account. If you’ve ever been billed for an item you didn’t buy or found yourself with a larger bank balance than you know you should have, you understand the importance of account reconciliation.

Deposits in Transit

According to Investopedia, the definition of account reconciliation is “an accounting process that compares two sets of records to check that figures are correct and in agreement. Account reconciliation also confirms that accounts in the general ledger are consistent, accurate, and complete.”  Reconciliation provides a check on the completeness of your financial data. In such a situation, there can be inter-company deposits made, depending on the requirements of different companies. However, since each of the group companies has its legal entity and the books of accounts also need to be maintained separately.

In such a case, your bank has recorded the receipts in your business account at the bank. As a result, the balance showcased in the bank passbook would be more than the balance shown in your company’s cash book. Your first step to prepare for a thorough account reconciliation is to compare your internal account register to your bank statement. Go through and check off each payment and deposit on your register that matches the statement. Make a note of all transactions on your bank statement for which you don’t have any other evidence, such as a payment receipt or check stub.

What are Common Account Reconciliation Discrepancies?

Every company has its own rules and regulations regarding the frequency of its reconciliations. Depending on the number of transactions there are to compare, this process can happen daily, monthly, or annually. Before we get into the account reconciliation process, let’s back up and think about the who, what, and when of the reconciliation workflow.

This process is important because it ensures that you can identify any unusual transactions caused by fraud or accounting errors. As a business, the practice can also help you manage your cash flow and spot any inefficiencies. Any differences are investigated, and corrective action is taken when appropriate. Therefore, the bank reconciliation process should be carried out at regular intervals for all of your bank accounts. This is because reconciling the cash book with the passbook at regular intervals ensures that your business’s cash records are correct. In the absence of proper bank reconciliation, the cash balances in your bank accounts could be much lower than the expected level.

What Does Reconciliation Mean in Accounting?

Whether it’s checks, ATM transactions, or other charges, subtract these items from the bank statement balance. Note charges on your bank statement that you haven’t captured in your internal records. Sometimes a deposit or a payment recorded in your accounting software isn’t on the monthly bank statement. When paper checks were the main way that vendors and employees were paid, this was a much bigger problem.

The reconciliation spreadsheet should be carried forward from month to month for each yearly accounting period. The cash account is reconciled to bank statements rather than a subsidiary journal (sub-ledger) for that account. Accounting software and ERP systems have built-in features and electronic forms to reconcile cash accounts with bank statements. Some companies use manual methods to complete the account reconciliation process.

During the reconciliation process, corrections may be made to the general ledger with adjusting journal entries. Or correct the sub-ledger if an error like the duplicate recording of a transaction is a reconciling item. Although a single-entity small business doesn’t need to consolidate the financial statements of multiple entities, companies engaging in M&A will need to complete a consolidation. Accountants’ consolidation processes may use automated ERP software functionality to combine results and remove intercompany transactions or use spreadsheets. Common account reconciliation differences are timing differences in recording to the general ledger, outstanding and missing transactions, and transaction errors. Finance teams can reconcile accounts directly by updating cash flow statements with individual transaction details.

This ensures there are no major discrepancies between the amount a vendor charges and the goods and services the company actually received. Later that day, you get an urgent text from your bank that your account is overdrawn by $5,000. If you had performed regular bank reconciliations, you would have known about that check and to keep your eyes peeled for it.

What are 3 types of account reconciliation?

Versapay integrates with your ERP to automatically apply payments made within the platform to their respective invoices. With our advanced cash application tools, we use optical character recognition (OCR) and AI to automate matching for payments outside the platform too. Even with an online payment portal, you’ll still get payments coming in from outside of the platform via checks or electronic payments. With an AR automation platform that has built-in image recognition and AI-enabled matching capabilities, you can automate the majority of those applications too. Automation software spares you the inefficient and tedious work involved in account reconciliation. These discrepancies happen when human error (like incorrectly keyed information) causes there to be differences between the general ledger and the subledgers.

• A bank fee is a common reconciling item that reduces a bank balance but usually isn’t reflected in the person’s checkbook register.
• At its core, account reconciliation involves comparing two sets of records to check that the figures match.
• Doing so allows companies to identify and post all necessary adjustments to their general ledger in a timely manner to ensure the accuracy and completeness of their financial statements.
• This means that the bank balance of the company is greater than the balance reflected in its cash book.

General ledger reconciliation, where accountants check the accuracy of the company’s account balances at the end of an accounting period, ensures the accuracy of financial statements. Reconciling the company’s accounts helps detect fraud and aids in regulatory compliance. Reconciling bank statements with cash book balances helps you, as a business, to know the underlying causes that lead to such differences.