Reconciliation in accounting is a crucial business task that verifies your financials. The Association of Certified Fraud Examiners Financial reports that 9% of all reported fraud cases involve financial statements.
If you’re not reconciling your accounts properly – or at all – your business is at greater risk of:
- Financial fraud
- Accounting errors
- Not maintaining regulatory requirements
Long-term success requires organizations to reconcile accounts and focus on strict financial management.
What is Reconciliation in Accounting?
Reconciliation involves comparing two sets of data to ensure accuracy. It’s easy to input an extra zero into a credit entry or to leave a zero out. A single error can mean the difference between having $10,000 in your account or $100,000.
Accuracy and consistency allow key stakeholders and managers to make smarter, data-backed decisions.
Comparing data between two record sets allows businesses to:
- Identify potential fraud
- Spot key errors
- Make better operational decisions
Reconciliation across account types can help business stakeholders have a transparent picture of the company’s finances and empower them to make data-backed decisions to reach growth goals.
You can reconcile multiple types of accounts, too.
Types of Reconciliation
Accounting reconciliation can be extensive, depending on the size of a business. General ledger reconciliation is common, but you may need to perform balancing on:
- Accounts receivable
- Accounts payable
- Bank statements
- Intercompany transactions
- Inventory
- Fixed assets
- Digital wallets
- Global currencies
- Credit and debit statements
Maintaining accuracy across all accounts sets your business up for success and allows you to have a complete, concise understanding of your company’s financial health.
Why is Reconciliation Important?
We’ve touched on the importance of accounting reconciliation throughout this article, but let’s reiterate some points and bring a few new ones to the table:
- Fraud costs small businesses up to $200,000 per year, on average. The frequency of fraud is much higher for smaller businesses than large enterprises because of a lack of resources and processes in place. If you want to prevent fraud from sabotaging your company, you can do it with reconciliation.
- Errors happen – accountants are human. You can spot key errors with reconciliation or find an irregularity in charges that can have a significant, negative impact on your business’s financials. Banks can even make mistakes, and spotting them as soon as possible will help you minimize these issues.
- Tax reporting must be accurate, which is challenging when your statements are inaccurate.
If you’re not reconciling your accounts, small amounts of fraud may be taking place that may continue to grow. Often, fraud starts small with minor discrepancies. If allowed to continue, the risk of significant losses will grow.
Accounting Reconciliation Best Practices
Reconciling your accounts is a time-intensive, necessary process. Offloading the task to an accountant will free up time and resources that are better spent in other areas of your business. It’s good practice to:
- Automate in any areas that you can. Relying on legacy tools will require more manual input, such as plugging numbers into spreadsheets. Automate any checks and monitoring that you can using cutting-edge tools like QuickBooks Online. You can import transactions into the platform and complete account reconciliation faster.
- Process standardization within your entire organization will put standards in place to follow for each monthly reconciliation. Consistent, accurate processes will set your business up for success.
- Risk tolerance is something to consider because it’s challenging to reconcile across all of the accounts and financial statements that you have. For example, you may want to avoid the reconciliation when the dollar value is under $10. Prioritize your account reconciliation.
- Regular reconciliation will help keep transaction volumes to a minimum and allow you to spot discrepancies faster.
- Segregation of each duty will keep multiple eyes on the financial statements and reduce the risk of fraud. Accountants can engage in fraud, too. If you have one professional for bank statements and one for invoices, there are now two sets of eyes verifying data for you.
- Independent reviews can spot discrepancies, too. An independent review of reconciliations allows for an added layer of protection and security for your business.
Processes and automation will empower accounting teams to verify your financial statements more accurately and consistently.
What Happens If I Find a Discrepancy after Reconciliation
You can undo reconciliation, but it’s a process that should be highly restricted. You’ll learn in our guide on how to undo reconciliation in QuickBooks Online that only accounting accounts can perform this action.
Why?
If any user could undo a reconciliation, hiding fraud would be much easier.
Reconciliation in accounting is important and should be done at least once per month. You can reconcile accounts more frequently, too. Maintaining accurate, error-free financials will allow you to continue growing your business with a firm understanding of its health.If you need help with reconciliation or want to learn how we can help you with your accounting needs, schedule a consultation now!
