Accounts reconciliation is one of the most critical aspects of the accounting process of the business. Reconciliation is a process of matching the transactions recorded in the company’s internal books with a source prepared by an external party like bank statements. It verifies the accuracy of the records and ensures that they are error-free. It facilitates a clear financial picture to the stakeholders so that they can make necessary decisions. If any shortcomings remain in the financial records due to inadequate accounts reconciliation services, further business planning and guidance will take a severe hit.
The external reports with which internal statements get compared include:
- Bank account reconciliation involves examining transactions that went through the bank and matching them with internal records.
- Credit card reconciliation includes matching internal transactions recorded in the books with credit card statements prepared by credit card service providers.
- Balance sheet reconciliation involves matching the assets and liabilities total amount and identifying discrepancies if there are any variations.
Why conduct reconciliation periodically?
Accounts reconciliation holds considerable significance over the accounting process of the business. However, companies must conduct it periodically- weekly, monthly, quarterly, or yearly- to avoid any problem that may lead the business to a sinkhole in the future. Other points illustrating the importance of periodic reconciliation include:
- Fraud detection:
Accounts reconciliation enables companies to discover any underlying fraud that gets hidden due to other things covering it. Often, firms do not care about the financial numbers and people recording them. Many aspects get ignored while accounting for the transactions. When you verify each entry with supporting documents, proofs, and reasons, you help yourself avoid any fraudulent activity in the business. Many scams unearthed globally involve manipulations in the books of accounts that took too long to identify. These scams depict why companies must cautiously practice reconciliation and focus on it.
- Minimizing accounting errors:
Among several of the accounting errors, some of them include:
- Omissions: It means missing entering a transaction in the company’s books of accounts. To illustrate, the data entry provider might skip a purchase invoice and not record it in the books. Omissions are hard to discover because there are no matching entries on the credit or debit side of the books. You will need a keen eye and proper proof to find these errors.
- Commission errors: These involve entering an amount into the wrong account. The sum is correct, but the account is incorrect. Therefore, the numbers are accurate but recorded in the wrong place.
With accounts reconciliation, you identify these errors early before they bottleneck in your accounting and bookkeeping process.
- Accurate tax reporting:
Accounts reconciliation clears your financial records from any errors and fraud possibilities. The result is accurate and efficient financial statements for business stakeholders to use accordingly. The internal management uses this information to make suitable decisions for business growth. Suppliers and creditors check the credibility of the company. Investors analyze the statements to ensure the safety of their money. And the government uses this information to ensure that the company pays the appropriate tax amount based on its regulations. Firms can find themselves in hot waters with the legal authorities if any issue persists in tax preparation and filing due to error-prone accounts.
- Simplification of numerous processes:
Accounts reconciliation helps firms track the due dates of various bills and organize their invoices accordingly. It simplifies further processing as well because they do not have to verify its accuracy repeatedly. Managing and examining the truth behind every transaction enables companies to ensure the absence of any factor that could potentially decline the company’s performance.
Who does accounts reconciliation benefit?
Accounts reconciliation benefits every industry in the market. From media to hospitality, legal to healthcare, e-commerce to construction, it is a universal process. The reason behind its applicability to every industry lies in the accounting and finance departments present there. Wherever there will be an accounts department, a reconciliation process will follow.
Benefits of accounts reconciliation:
After learning about accounts reconciliation, we can gather a list of the following benefits:
- Higher accuracy and efficiency:
Since the records have been swept clean of any errors and unauthorized entries, the accuracy of the statements shoots up. The departments that have to utilize the information in financial statements do not have to worry about any inconsistencies or inefficiencies. Therefore, they do not spend considerable time and effort verifying the accuracy of the sources and instead use it to their advantage.
Instead, they invest the time saved in managing the business’s risks and analyzing the potential investment opportunities available to the company. It can help facilitate growth and expansion without any hassle.
- Improved quality and visibility:
Since the financial records are clear of specks of dust and mites like errors and scams, their reporting quality improves considerably. Therefore, these reports offer better visibility and oversight to predict future trends and plans. It helps businesses make positive changes by providing them with accurate information. High-quality records enable further information processing to become smooth and streamlined. Also, it improves the image of the organization among the industry rivals and associated parties.
Accounts reconciliation enables companies to verify the accuracy of their records and identify errors and discrepancies that can snowball and ruin the company’s workflow. It helps find unusual and unapproved transactions that may have connections to a scam. Also, it controls theft activities by employees having direct control over the statements. Overall, reconciliation brings out the best in financial statements by clearing anything infectious. It boosts the quality of the reports and improves financial decision-making, tax filing, and several other connected activities. Every business must undertake it once a month to have mess-free and transparent financial records that no one can fault.
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