Reconciliation is an underappreciated yet critical internal control that helps ensure a business’s financial integrity and serves as a small business accounting solution.
This fundamental accounting process ensures the actual money spent or earned matches the money entering or leaving the business’s account at the end of a fiscal period. This helps to provide a foundation for the rest of a business’s finances. Any inefficiencies in the process can lead to mistakes in the financial statements and overall inaccuracies when closing finances for the year. Besides, the practice can help you manage your cash flow and spot any inefficiencies.
Please keep reading to discover the meaning of reconciliation and its critical role in business accounting and corporate financial management.
Put simply, reconciliation is the financial detective work that ensures the numbers in your account are always on the right side of the law. It’s the process of comparing your financial records to verify that the balances match, keeping your business’s financial health in check.
Examples of reconciliations are:
Comparing the bank statement to your internal record of cash receipts and disbursements.
Comparing your accounts receivable statement to a customer’s record of invoices outstanding.
Comparing a supplier statement to your record of outstanding bills.
How it works: Reconciliation is typically done at regular intervals, such as monthly, quarterly, or annually, depending on the business, as part of standard accounting procedures.
There is no standard reconciliation procedure in online business accounting services. However, GAAP outlines two ways to reconcile an account: double-entry accounting and account conversion.
Double-entry accounting—commonly used by businesses—entails posting every financial transaction into the ledger twice—once in the credit account and the other in the debit account—so that the sum will always equal zero. For example, when a sale is made, the cash account is increased with a debit, and the inventory account is reduced with a credit.
On the other hand, account conversion involves the comparison of source documents like receipts, invoices, and canceled checks to the corresponding journal entries in the ledger.
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Why are account reconciliations necessary?
Reconciling the accounts is particularly important for businesses because it allows them to check for fraudulent activity and prevent financial statement errors.
Let’s look at why reconciliation is necessary in professional business accounting.
- Helps validate data entry: Reconciling the accounts allows businesses to identify any irregularities in the financial records, such as mistakenly entering wrong amounts, duplicating entries, missing transactions, and other data entry errors.
- Ensures the completeness and accuracy of the financial statements: With the accounts’ correct information, businesses ought to create accurate financial statements, which facilitate better decision-making and forecasting.
- Reconciliation helps manage and monitor cash flow: By providing accurate financial information, reconciliation gives businesses a clear understanding of their performance. This allows them to monitor their spending, better manage their cash flow, and strategically plan day-to-day and long-term investments.
- Helps maintain relationships: Regularly reconciling vendor accounts is not just about financial accuracy, it’s about maintaining good relationships. By ensuring suppliers are paid correctly and on time, you’re demonstrating your commitment to them and their services. This is crucial for the smooth operation of your business and for avoiding any loss of service or goods from key external stakeholders.
- Avoid late payments and penalties from banks: Financial institutions are less likely to be forgiving for missed payments or any approved overdraft values being exceeded. This is where reconciling helps by minimizing the likelihood of receiving avoidable hefty penalties.
- Protects from potential frauds: Reconciliation not only ensures financial accuracy but also acts as a shield against fraud and embezzlement. By detecting anomalies in data and records, it can alert management to potential threats, safeguarding the organization from legal issues and liabilities. This not only protects the business’s financial integrity but also its market confidence and goodwill.
- Ensures compliance: Reconciliation became a requirement under the 2002 Sarbanes-Oxley Act, which mandates a high level of financial reporting, record keeping, and internal auditing for businesses, regardless of size. Plus, the act imposes harsher penalties for violators, further emphasizing the importance of reconciliation.
- Helps with accurate tax reporting: Reconciliation helps provide concise information to the accountant, tax preparer, or the IRS to evaluate the business’s tax situation. In short, reconciling accounts is a must to generate a correct tax return.
How outsourced business accounting services simplify account reconciliation
Reconciling accounts can be a long and tedious process, often involving the minutiae of everyday business transactions. However, opting for outsourced business accounting services can alleviate this burden. By handling the inefficient and tedious work of account reconciliation, these services allow you to focus on what really matters-the growth of your business.
Want to know more about reconciling accounts? Escalon provides comprehensive back-office solutions to businesses to help them focus on growth. Escalon’s services support businesses with outsourced finance, taxes, accounting, human resources, risk management, and compliance. Talk to an expert today.
This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal, or accounting advice in this article. If you would like to engage with Escalon, please get in touch with us here.
