Why is reconciling accounts important for your business?
The account reconciliation procedure gives finance teams confidence that their information is reliable and allows them to see any mistakes or discrepancies. It is the very first step in an organization’s financial closing process.
Using manual reporting methods, the account reconciliation process runs the risk of errors via spreadsheets and a lack of visibility that creates further problems. It brings significant challenges in general, which increases the chances of risk.
In this blog, we will discuss the importance of reconciling accounts and how the process actually works if you want to do it for your business.
Importance of Account Reconciliation in Business
Financial data has a crucial role in the success of your business. You need complete, accurate, and reliable financial information to make the right decisions to grow your business.
Arm yourself with the right and accurate data by adopting internal controls. This simply
includes regular account reconciliations.
It may be a time-consuming and tedious task, but it’s a crucial accounting control.
With regular account reconciliations, you can identify the following:
- Errors in bookkeeping – include unrecorded sales and any significant expense counted multiple times.
- Not recorded bank account transactions — Includes fund transfers and service fees that were not mentioned in the account.
- The property was stolen— Some instances are payments done to fraudulent vendors and inappropriate inventories.
Regular account reconciliation helps you believe that your financial information is reliable. The on-time account reconciliations save you from bad business decisions and help you succeed.
4-step account reconciliation process
Reconciling the trial balances in the general ledger with corresponding accounts in sub-ledgers or other secondary transaction systems primarily has:
- Roll-forward schedules – The closing balance for each account (For example, depreciation, accounts payable, prepaid assets, and receivable) at the end of a specific period needs to be equal to the opening balance at the beginning of the next one.
- Sub-ledgers – The most common include human resources information systems (HRIS) or payroll and fixed asset tracking (FAST) systems.
- Bank statements – For the bank or account reconciliation process, the balance in the bank must match the cash balance displayed on a balance sheet.
Adjust entries and ensure they’re all reviewed, investigated, and approved before posting to the GL. Reconciling and adjusting entries are complicated processes and where most bottlenecks in the close process occur. This is where accountants spend the bulk of the close cycle, acting as internal auditors and detectives to identify the source of every exception and the supporting information to explain them.
Provide supporting calculations and documentation (e.g., if an account doesn’t balance by a wide margin, explain why). External auditors, regulators, and even senior management need trusted numbers, transparency, and documentation to find the sources and explanations for every exception quickly.
Preparing financial statements, regulatory filings, and other reports for the period. The more accurate your numbers are, the more confident your internal and external stakeholders will have. And with account reconciliation done right, the results should be based on 100% reliable numbers.
Reconciling your account simply means comparing your internal financial records against the records provided to you by your bank. This process is essential as it ensures that you can recognize any unusual transactions caused by fraud or accounting mistakes. As a business, the practice can further help you manage your cash flow and spot any inefficiencies.