Why reconciliation is the secret to accurate business accounting

Reconciliation is an underappreciated yet critical internal control to help ensure a business’s financial integrity. 

This fundamental accounting process ensures the actual money spent or earned matches the money leaving or entering the business’s account at the end of a fiscal period. Thus, creating the foundation for the rest of a business’s finances, and any inefficiencies in the process can lead to mistakes in the financial statements and overall inaccuracies in the financial close. Besides, the practice can help you manage your cash flow and spot any inefficiencies.

Read on to learn what reconciliation means and why it is so important in business accounting.

Understanding reconciliation

What is reconciliation? Put simply, reconciliation is the process of comparing the numbers in an account with another financial record to verify the balances match. It helps businesses to ensure that the correct balances are recorded within their accounts and every transaction sums to the correct ending account balance. 

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 normal accounting procedures. 

There is no standard way to perform reconciliation in business accounting. However, GAAP  outlines two ways to reconcile an account — double-entry accounting and account conversion. 

Double-entry accounting — which is 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 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.

Why are account reconciliations necessary?

Reconciling the accounts is a particularly important activity for businesses because it is an opportunity to check for fraudulent activity and to prevent financial statement errors.    

Let’s have a comprehensive look at why reconciliation is so important in business accounting.

Helps validate data entry. Reconciling the accounts allows businesses to identify any irregularities in the financial records, such as entering wrong amounts, duplicating entries, missing transactions and other data entry errors.

Assures the completeness and accuracy of the financial statements. With the accounts having correct information, businesses ought to create accurate financial statements. Thus, facilitating better decision-making and forecasting.

Help manage and monitor the cash flow. By providing accurate financial information, reconciliation gives businesses a clear understanding of how they are doing. This helps them keep an eye on their spending and manage their cash flow better, and plan day-to-day and long-term investments more strategically.

Maintain good relationships with suppliers. Reconciling the vendor accounts regularly will result in them being paid right and on time. This is critical to ensure that the day-to-day operations of the business are maintained.

Besides, deteriorating relationships, failing to pay suppliers can result in a 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.

Alerts management to fraud and embezzlement. Reconciling accounts can help businesses detect anomalies in data and records to prevent fraud. Thus, saving the organization from legal wrangling and liabilities. Plus, it also minimizes the risk of losing 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, no matter the size. Plus, the act imposes harsher penalties for violators further emphasizing the importance of reconciliation.

Accurate tax reporting. Reconciliation helps provide succinct information to the accountant, tax preparer or the IRS to evaluate the tax situation of the business. In short, reconciling accounts is a must to generate a correct tax return.

How outsourced business accounting services simplifies account reconciliation

Without a doubt, reconciling accounts requires businesses to go through a long tedious process. Plus, it’s a routine task. Dealing with the minutiae of everyday business transactions regularly can be sometimes mind-numbing. Opting for outsourced business accounting services spares you the inefficient and tedious work involved in account reconciliation. Besides, outsourcing ensures precision and accuracy, and allows you to focus on growth. 

Want more? 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 resource, 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 contact us here.

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