When paper checks were the main way that vendors and employees were paid, this was a much bigger problem. But today, nearly instantaneous communication of financial transactions means the delay between the money leaving one account and reaching another one may be measured in minutes or hours, not days or weeks. 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 a company, bookkeepers, clerks, and accountants keep a record of these debits and credits.
Still, the supporting documentation (i.e., a bank statement) says the bank account has a balance of $520,000. For example, when performing bank reconciliation, a business partnership accounting compares its financial statements with the records received from the bank. This helps identify timing delays in deposits, payments, fees, and interest that may have been recorded by one entity but not the other.
Why accounting reconciliation matters in business
- Other reconciliations turn non-GAAP measures, such as earnings before interest, taxes, depreciation, and amortization (EBITDA), into their GAAP-approved counterparts.
- It may seem obvious, but this is essential for making sure the accounting records are right.
- Its purpose is to ensure accuracy and consistency of financial data, which is vital for informed decision-making and maintaining financial integrity.
Businesses are generally advised to reconcile their accounts at least monthly, but they can do so as often as they wish. Businesses that follow a risk-based approach to reconciliation how to calculate accounts payable on balance sheets will reconcile certain accounts more frequently than others, based on their greater likelihood of error. No matter how diligent the accounting team is, sometimes a transaction just slips through the cracks. There are 5 main recognised kinds of reconciliation accounting that are industry-wide.
Bank reconciliation
It involves calling up the account detail in the statements and reviewing the appropriateness of each transaction. The documentation method determines if the amount captured in the account matches the actual amount spent by the company. Thirdly, account reconciliation is vital to ensure the validity and accuracy of financial statements.
Why Should You Reconcile Your Accounts?
Prior to founding FloQast, he managed the accounting team at Cornerstone OnDemand, a SaaS company in Los Angeles. The analytics review method reconciles the accounts using estimates of historical account activity level. It involves estimating the actual amount that should be in the account based on the previous account activity levels or other metrics. The process is used to find out if the discrepancy is due to a balance sheet error or theft. The bank discovered that the mysterious transaction was a bank error, and therefore, reimbursed the company for the incorrect deductions. Rectifying the bank errors bring the bank statement balance and the cash book balance into an agreement.
After finding evidence for all differences between the bank statement and the cash book, the balances in both records should be equal. You should prepare a bank reconciliation statement that explains the difference between the company’s internal records and the bank account. For instance, while performing an account reconciliation for a credit card clearing account, it may be noted that the general ledger balance is $260,000. Still, the supporting documentation (i.e., credit card processing statement) has a balance of $300,000.
The charges have already been recorded by the bank, but the company does not know about them until the bank statement has been received. Finally, look for the transactions that are in the general ledger, but not on the statement, and vice versa. Do you need to record the bank fees or credit card interest in the general ledger? Add and subtract these as appropriate until you can get both sides to match.
Ensure regular and timely reconciliation
Another possibility is that the difference is caused by the fraudulent manipulation of accounting records. Account reconciliations should be performed regularly, ideally monthly, to ensure financial records are accurate and up-to-date. Such regular and timely reconciliations support financial integrity and informed decision-making. A bank error is an incorrect debit or what is overhead cost and how to calculate it credit on the bank statement of a check or deposit recorded in the wrong account.
