Account Reconciliation and Subledgers

Reconciling an account is an accounting process that is used to ensure that the transactions in a company’s financial records are consistent with independent third party reports. Reconciliation confirms that the recorded sum leaving an account corresponds to the amount that’s been spent and that the two accounts are balanced at the end of the reporting period. Reconciliation must be performed on a regular and continuous basis on all balance sheet accounts as a way of ensuring the integrity of financial records. This helps uncover omissions, duplication, theft, and fraudulent transactions. Basic reconciliation in accounting – checking cash against bank statements, for example – is very simple. For these basic reconciliations, you’re often checking something physical like cash or even inventory against paperwork, in this case, banking withdrawal/deposit statements or purchase orders for inventory.

It is essential to reconcile the balance of accounts payables due to short payments, disputes, early payment discounts, and much more. This ensures smooth operations, supplier relations, market reputation, and much tips on starting a bookkeeping business more. Often the cash balance in the book of accounts and the bank accounts may not match. This could be due to many causes like missed entries, bounced payments, charges incurred, interest accrued, and much more.

Automated reconciling

Stripe offers a powerful reconciliation solution that streamlines the process for businesses. Stripe’s reconciliation solution automates the reconciliation process for businesses and offers a comprehensive picture of your money movement. For example, Company XYZ is an investment fund that acquires at least three to five start-up companies each year.

• Careful attention to details and review of reconciliations by someone who doesn’t work with that account can help catch many instances of fraud.
• Similarly, if there are deposits appearing in the bank statement but are not in the cash book, add the entries to the cash book balance.
• But, if they happen too often and can’t be explained, this may indicate something’s not right with your books.
• Learn how a FloQast partnership will further enhance the value you provide to your clients.

Conversely, when your company makes a purchase, the cash used would then be recorded as a credit in the cash account and a debit in the asset account. Most accounting software applications offer automatic bank reconciliation, which reduces the work. However, if some of your bank accounts aren’t connected to your software, you’ll have to reconcile those manually. Instead of spending days each month reconciling accounts, FloQast AutoRec can do that in minutes.

Why is account reconciliation important for businesses?

This type of reconciliation happens when a parent company unifies all the general ledgers of its subsidiaries to eliminate intercompany flows and minimize bank transaction fees. This process helps identify inconsistencies between subsidiaries and unrecorded transactions or balances on the books of group companies. Using accounting software will make it much easier to reconcile your balance sheet accounts regularly. There are several steps involved in the account reconciliation process, depending on the accounts that you’re reconciling.

Outside of selling their products and services, one of the most important things a small business owner can do is reconcile their accounts. Account reconciliation is simply the act of reconciling one set of transactions with another set to ensure both sets match. Accounting software automation and adding a procure-to-pay software, like Planergy, can streamline the process and increase functionality by automatically accessing the appropriate financial records. If your AR balance is $60,000, but you only have $40,000 in invoices that are due, your net profit will be overstated and you’ll be paying taxes on income that you’ll never receive. While reconciling your bank statement, you notice the bank debited your account twice for $2,000 in error.

What Is the Difference Between Account Reconciliation and Invoice Reconciliation?

While the reconciliation process remains the same, with two sets of documents compared for accuracy, the difference lies in what is being reconciled. While very small businesses can use cash basis accounting, if you have employees or have depreciable assets, you’ll need to use accrual basis accounting. Accrual accounting is more complicated but provides a better insight into the financial health of your business.

Audit Your Reconciliation Procedures

In single-entry bookkeeping, every transaction is recorded just once (rather than twice, as in double-entry bookkeeping), as either income or an expense. Single-entry bookkeeping is less complicated than double-entry and may be adequate for smaller businesses. Companies with single-entry bookkeeping systems can perform a form of reconciliation by comparing invoices, receipts, and other documentation against the entries in their books. It’s a good idea to reconcile your checking account statement (or at least give it a careful look) when you receive it each month.

How Often Should Account Reconciliations Be Performed?

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The documentation review process compares the amount of each transaction with the amount shown as incoming or outgoing in the corresponding account. For example, suppose a responsible individual retains all of their credit card receipts but notices several new charges on the credit card bill that they do not recognize. Perhaps the charges are small, and the person overlooks them thinking that they are lunch expenses, for example. Moreover, the process of account reconciliation can also be automated or assisted with the help of financial software or services, although human oversight is usually necessary to validate and verify the results. Common account reconciliation differences are timing differences in recording to the general ledger, outstanding and missing transactions, and transaction errors. Make any required adjustments between the categories based on a calculation of short-term notes payable liabilities for the next 12 months to classify amounts in the categories as short-term or long-term correctly.