As a hardware-centric, procurement-heavy company, you understand the importance of accurate accounting in managing your finances, controlling expenses, and making data-driven decisions. However, mistakes can still occur, leading to discrepancies and inaccuracies in your accounting records. That's where account reconciliation comes in. In this post, we'll delve into the different types of reconciliation available and their importance in ensuring accurate accounting.
Account reconciliation is the process of comparing your internal accounts to external documents, such as bank statements, supplier invoices, and customer receipts, to ensure that the correct balances are recorded and your accounting is accurate. It offers several benefits, including ensuring accuracy for financial statements and taxes, maintaining good relationships with suppliers and customers, and avoiding late payments and penalties.
We'll explore the most common types of reconciliation, such as bank reconciliation, vendor reconciliation, customer reconciliation, intercompany reconciliation, business-specific reconciliation, credit card reconciliation, balance sheet reconciliation, and cash reconciliation. Each of these types has its unique purpose in ensuring accurate accounting.
To reconcile your accounts, you need to follow four basic steps: compare opening balances, record the difference in closing balances, update accounts, and review closing balances. This process ensures that every transaction recorded in your books is verified and irregularities or errors are identified and corrected.
Accurate accounting is essential to your business's success, and account reconciliation is an effective way to eliminate mistakes and ensure the right balances are recorded. To streamline your processes even further and eliminate more mistakes, you can request a demo of ControlHub, a complete purchasing solution that helps you create purchase orders, make payments, and sync all your data with your accounting software.
What is Reconciliation?
Before looking at the types of reconciliation in more detail, let’s first recap what account reconciliation is. At its core, reconciliation is the accounting process you’ll follow to ensure the correct balances are recorded in your accounts and that your accounting is accurate.
As such, account reconciliation typically involves comparing your internal accounts to external documents and information like bank statements, supplier invoices, and customer receipts to ensure they have the same balance on a specified date.
Why is Reconciliation Important?
Now that we’ve recapped what reconciliation is, let’s consider why account reconciliation is so important. Here, reconciliation offers several benefits:
- Ensure accuracy. It’s vital that you have accurate accounting of all the transactions in your business. When you do, you’ll be able to prepare accurate financial statements, be ready for audits, and file your taxes correctly. In addition, accurate accounting and financial statements help you gauge the financial health of your business, which also makes it easier to plan.
- Maintain good relationships. Account reconciliation can help you see who you owe money to and who owes you. As such, you’ll always be able to pay your suppliers, and you’ll never demand payment from customers where no payments are due. Because of this, you’ll be able to build and foster stronger relationships with your supplier and customers. And these relationships are an important asset for your business’s success.
- Avoiding late payments and penalties. Apart from the above, account reconciliation also helps you stay on top of your bills. As such, you’ll always know which bills have been paid and which not. As a result, you’ll be less likely to miss payment, and you’ll avoid unnecessary fines and penalties.
Different Types of Reconciliation
We’ve now seen what reconciliation is and why it’s important. Let’s now look at the different types of reconciliation you could use to ensure accurate accounting. Keep in mind, though, depending on your business and your unique requirements, you might not use all of them.
Bank reconciliation is probably one of the most common types of reconciliation you’ll use. During the reconciliation process, you’ll reconcile the balance in your books by comparing them to your monthly bank statement. To do this, you’ll compare every transaction in your internal accounts to its counterpart in your bank statement.
During the bank reconciliation process, the most common issues you’ll encounter are:
- Checks you’ve issued that haven’t been banked or that have been dishonored by the bank.
- Transactions in your bank statement that haven’t been recorded in your books.
- Transactions in your books that don’t match those on the bank statement due to an error on either your or the bank’s side.
Ultimately, bank reconciliation allows you to verify every transaction recorded in your books and is useful for identifying errors and irregularities which, in turn, guarantees accurate accounting.
Vendor reconciliation compares the amounts you owe to vendors based on their statements to transactions in your accounts payable. During the vendor reconciliation process, you’ll get a statement from the vendor that includes information about every transaction for a specific period. Here, it’s important to remember that not all vendors might provide regular statements automatically, so you might need to request statements from them.
Once you have the statement, you’ll compare the transactions on it to the transactions in your books. If you then encounter any discrepancies, you’ll make adjustments to correct the entries. This reconciliation process ensures that you pay your vendors any amounts owing on time and that you don’t overpay for any goods or services you receive from the vendor.
During customer reconciliation, you’ll compare the outstanding balance of every customer to your accounts receivable. During the reconciliation process, you’ll compare every transaction and its related invoices or receipts in your accounts receivable to your general ledger.
When doing this, you’ll ensure that there are no discrepancies in your accounts which, in turn, also helps you identify any irregularities, fraud, or theft. Simply put, through customer reconciliations, you’ll verify what every customer owes you.
You’ll typically perform customer reconciliations at the end of the month before you issue monthly statements to your customers. Also, if you identify any irregularities in your accounts, you should make adjustments to correct them before you issue statements to your customers.
Intercompany reconciliation is the process where parent companies compare and reconcile their books with those of their subsidiaries in order to produce accurate consolidated accounts. As such, intercompany reconciliations are used by companies that form part of a wider group of companies.
During this reconciliation process, one company will compare the recorded value of what it’s owed or what it owes to the recorded balance of a subsidiary. The company is then able to identify any errors because of incorrect invoicing or other transactions like loans or deposits. While most of these transactions relate to cash, they’re also encountered when one company pays dividends to another company in the group.
The objective of intercompany reconciliations is to match the balances in the accounts of different companies in the group to ensure that there’s no artificial profit or loss generated through intercompany transactions.
Business-specific reconciliations are unique tools used by businesses for accurate accounting based on their specific needs and requirements. A perfect example here is a company that sells physical goods. The company would then need to perform a reconciliation to ensure that the value of the goods held in stock match the value of goods recorded in its books.
Credit Card Reconciliation
As the name implies, credit card reconciliation is the reconciliation process you’ll follow to compare all the credit card transactions in your books with the transaction on your credit card company’s statements or receipts. This allows you to identify any errors in your accounts or the credit card company’s statements.
And once any errors are identified in your books, you’ll be able to correct them by making correcting entries. Also, if you encounter any errors on your credit card statements, you can report them to your credit card company to have them rectified.
Balance Sheet Reconciliation
During balance sheet reconciliation, you’ll reconcile the closing balances of all of the accounts contained in your balance sheet. This ensures that all the entries recorded in your books and which result in your accounts’ closing balances are correct.
You’ll use cash reconciliation to ensure that the amount of cash in a cash register matches the cash on hand at the end of a business day. To perform a cash reconciliation, you’ll compare the cash balance with the cash receipts generated for the day. Considering how cash reconciliation works, it’s not only an effective tool to help you with cash forecasting, but helps you identify and eliminate employee theft.
How Do You Reconcile Accounts
You’ve now seen what types of reconciliation you could use in your business. Now, the question is: How do you reconcile accounts? Here, the steps you’ll need to follow are:
- Compare opening balances. You’ll start the account reconciliation process by comparing the opening balance of your internal account with the external document. For instance, you’ll compare the opening balance of your bank ledger with the opening balance of your bank statement when doing a bank reconciliation. These two balances should match.
- Record the difference in closing balances. The next step is to compare the closing balance of your internal account to the closing balance of the external document. So, using the bank reconciliation example mentioned above, you’ll compare the closing balances of your bank ledger and bank statement. The difference in closing balances is the amount needed to reconcile the account.
- Update accounts. The next step is to work through every transaction in your internal account and compare it with the external document. Where you identify any discrepancies, you’ll make correcting entries or record new transactions to update your account.
- Review closing balance. Once you've made all the adjustments needed, you should review the closing balances of your account and the external document to make sure they match. There might, however, be instances where there will be a difference between the closing balances due to, for instance, timing difference. In these cases, you should then prepare a reconciliation report to explain these differences.
The Bottom Line
For hardware-centric, procurement-heavy startups, accurate accounting is essential for managing finances, controlling expenses, and making data-driven decisions. However, mistakes can occur, leading to discrepancies and inaccuracies in accounting records. Account reconciliation is a process that can help eliminate these mistakes and ensure accurate accounting.
Account reconciliation involves comparing internal accounts to external documents, such as bank statements, supplier invoices, and customer receipts, to ensure correct balances are recorded and accounting is accurate. It offers several benefits, including accurate financial statements, readiness for audits, correct tax filing, and a gauge of financial health. Additionally, reconciliation can help maintain good relationships with suppliers and customers and avoid late payments and penalties.
The most common types of reconciliation are bank reconciliation, vendor reconciliation, customer reconciliation, intercompany reconciliation, business-specific reconciliation, credit card reconciliation, balance sheet reconciliation, and cash reconciliation. Each of these types has its unique purpose in ensuring accurate accounting.
To reconcile accounts, four basic steps are required: compare opening balances, record the difference in closing balances, update accounts, and review closing balances. This process verifies every transaction recorded in books and identifies irregularities or errors for correction.
Accurate accounting is essential for startups, and account reconciliation can help eliminate mistakes and ensure correct balances are recorded. To streamline processes further, ControlHub is a purchasing solution that can help create purchase orders, make payments, and sync data with accounting software.
Frequently Asked Questions
1. What is intercompany reconciliation, and why is it essential for group companies?
Intercompany reconciliation is like a family reunion for parent companies and their subsidiaries! It ensures their books are in sync, avoiding confusion and keeping operations running smoothly. It's a secret weapon to maintain harmony within the group of companies.
2. How can business-specific reconciliation benefit my company?
Business-specific reconciliation is like a tailored suit for your accounting needs. For businesses selling physical goods, it helps ensure the value of your stock matches what's recorded in your books. Looking sharp and accurate in your accounting will lead to smooth business operations!
3. How does credit card reconciliation help me spot and fix errors?
Credit card reconciliation is like having a personal detective for your credit card transactions. It helps you spot any mistakes, ensuring your financial records are error-free. No more worrying about those sneaky errors, just swipe with confidence!
4. What is balance sheet reconciliation, and why is it important?
Balance sheet reconciliation is like a balancing act for your accounts. It ensures everything lines up perfectly, just like a pro tightrope walker. This meticulous process helps maintain accurate financial records, which is vital for making informed business decisions.
5. How can cash reconciliation help keep my cash flow in check?
Cash reconciliation is like having a magic wand to ensure all your cash is accounted for. It helps you spot any discrepancies and keeps your cash flow running smoothly. And hey, it also helps detect any sneaky employee tricks, keeping your finances secure!
6. Can you explain the steps to reconcile my accounts in simple terms?
Absolutely! Here's the magic in four simple steps:
Step one: Compare opening balances between your internal account and external document.
Step two: Record the difference in closing balances, and don't worry if there's a discrepancy; we'll fix it!
Step three: Update your accounts by comparing each transaction and making corrections if needed.
Step four: Review the closing balances, and if there are tiny differences, prepare a reconciliation report. Voilà, you're all set!
7. How can reconciliation bring joy to my business accounting?
Reconciliation is all about finding joy in accurate financials and smooth operations. It's like taking care of a lovely garden; a little effort goes a long way. With these reconciliation superpowers, your business accounting will be a piece of cake, and you'll feel confident and empowered in managing your finances.
8. Why is staying on top of my accounts crucial for my entrepreneurial journey?
Staying on top of your accounts is like a compass guiding you through your entrepreneurial journey. It helps you make informed decisions, prepares you for tax season, and builds trust with investors and partners. So, keep hustling, stay inspired, and let reconciliation be your ally in financial success!