The Importance of Account Reconciliation
Account reconciliation is defined as an accounting process that seeks to check two sets of records (often internal and external) to ensure that the figures are accurate and in agreement – so they reconcile.
This is important because it helps the bookkeeper detect mistakes, discrepancies, or fraud that could severely impact the financial health of the company. Reconciliation isn’t just a good business practice, it can be the things that defines the success of a business.
Why Bookkeeping is Important
Statistically, the Bureau of Labor Statistics (BLS) has shown that 18.4% of new businesses fail within one year, with 49.7% failing after five years. Which means bookkeeping isn’t just important – IT’S NECESSARY!
An accounting system provides information about the business’ performance, cash flow, and financial condition. One accounting software recommended by The Green Executive is QuickBooks Online. QuickBooks allows a company to keep track of financial functions like income and expenses, employee expenses and inventory in real-time. When a business is free of financial worries, it can focus on growth and revenue.
The Reconciliation Process
While there’s no specific method that reconciliation should be done in, it should involve comparing your internal accounts to your external accounts, by reviewing payments and deposits on bank statements for all outflows and inflows of cash, noting charges that have no receipts, and ensuring that all debits match with credits and vice versa.
One method that The Green Executive uses over other companies, is “receipt forward” bookkeeping. Receipt forward is a process where all receipts are scanned into a software like Quickbooks Online and then paired with banking and credit card statements to reconcile accounts. This allows the bookkeeper to document expenses into the correct category – making tax time a lot easier on your accountant.
Bookkeeping Note: While keeping and maintaining receipts may seem like a tedious chore, receipts are necessary for categorizing expenses. They also serve as documentation to support deductions. Organized and well documented receipts can be the thing that saves a business during an audit. The IRS requires receipts for all business expenses of $75 or more – and they should be kept for 3-6 years.
Types of Business Reconciliations
- Bank reconciliation – the most common type of reconciliation. Bank reconciliations summarize banking and business activity by reconciling it’s account its financial records.
- Vendor reconciliation – compares the balance owed on statements provided by vendors to the transactions within the payable ledger. Vendor statements typically include a listing of all unpaid invoices at the time the statement is sent. Tip: Request a monthly statement from your vendor to reconcile accounts payable or money owed by business.
- Customer reconciliation – used to compare an outstanding balance that a customer has at a business against the bookkeeping ledger. This type of business reconciliation is used to reconcile accounts receivable, or money due, to a business by its customers.
- Intercompany reconciliation – a less common type of reconciliation but useful for companies where two branches of the business are under the same parent company. Tip: If your company has recently acquired another business or has a subsidiary, consider this form of reconciliation as it will help mitigate the risk of accounting crossover with a business that may have a different accounting system.
Without account reconciliation, businesses have a hard time identifying and preventing balance sheet errors, which in turn, can also make it hard to catch fraud or theft. By staying on top of account reconciliation month, a business can decrease that risk.
Here are five reasons why account reconciliations is a necessary part of the accounting process:
- Eliminates accounting errors.
- Keeps a running balance of all accounts.
- Makes it easy to spot unauthorized transactions.
- Tracks spending.
- Keeps bank fees and other taxes at top of mind.
Reconciling accounts is one of the most overlooked tasks in bookkeeping. By learning more about the reconciliation process and how to get started reconciling accounts, it’s our hope that you will make bookkeeping reconciliation (and the right account software) a priority.
The Green Executive® knows that when it comes to your numbers – there’s no room for error. A firm grasp on your financials earns you a firm grasp on your business. Without it, you’re simply guessing and hoping for the best. Don’t take any chances – contact us today and let us help you get a clearer picture of what’s going on within your business’s financials.