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Ever wondered how businesses maintain financial accuracy and manage cash flow? The answer lies in the often overlooked but crucial process of reconciliation. Let’s delve into this financial secret!
April 15, 2024
Aashna Vidyarthi is a content writer and literature enthusiast. She has contributed her creative talents to various brands across industries, helping them bring their visions to life through compelling narratives and unique writing. Her love for literature and a keen interest in different cultures are integral parts of Aashna’s creative journey as she continues to weave enchanting tales that resonate with audiences, embracing the power of imagination and the beauty of diverse perspectives. A bibliophile who reads anything and everything that comes her way and enjoys every word.
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.
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.
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.
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