In this post, we are going to discuss what does reconciling an account involve.
Reconciliation is an accounting process in which two sets of records are compared to ensure that the results are correct and consistent.
Reconciliation also guarantees that the general ledger accounts are correct, consistent, and complete.
Nevertheless, in contrast to business, reconciliation can be employed for personal reasons.
Knowing what does reconciling an account involve is critical for your company’s financial health, as it helps in the detection of any errors, discrepancies, or fraud.
Account reconciliation is required because the balances of liability, asset, and equity accounts are moved forward each year.
During reconciliation, you should verify the transactions documented in an internal document keeping account to an external monthly report from authorities such as credit card and bank providers.
The sense of balance in the two records must correspond, and any differences in the reconciliation report must be clarified.
Methods for Reconciling an Account
The following are the two major procedures for reconciling an account:
Documentation review is the most common type of account reconciliation. It requires gathering information related to the account from statements and evaluating the transaction’s acceptability.
The documentation approach checks to see if the amount noted in the account matches the real amount in the company’s books.
The accounts are reconciled using estimations of prior account activity levels in the analytics review approach.
It comprises forecasting the actual amount in the account depending on previous data or account activity levels.
The approach identifies whether the inconsistency is due to a stealing or balance sheet error.
How Does Account Reconciliation Work?
Accounting software can save you a lot of time by doing much of the work for you to reconcile accounts.
Human intervention is still required to catch transactions that may not have been entered into the accounting system.
These measures will assist you in ensuring that all of your funds are correctly accounted for.
Side-by-Side Comparison of Both Records
Comparing your internal account record to your bank statement is the first step in preparing for a full account reconciliation.
Mark off each deposit and payment that corresponds to the statement in your register.
Make a list of any activities on your bank report for which you have no other proof, such as a check stub or payment receipt.
Keep Track of any Cash Book Payments that do not Reflect on the Bank Statement
ATM withdrawals and checks are instances of probable transactions. The transactions on the bank statement should be subtracted.
Activities that appear on the financial statements but do not come in the cash book should also be highlighted. ATM service costs and check printing fees may be among the transactions affected.
Verify Incoming Funds
Verify that all arriving transactions have been accounted for in your personal records as well as your bank account.
Look for deposits or account credits that the bank hasn’t yet recorded and add them to the balance on the statement.
Make the entries if the bank shows money deposits that aren’t represented in your internal records.
Verify the Bank Statement for any Inconsistencies
Any deposit or check that is found in the incorrect account is referred to as a “bank error.”
While bank errors are unusual, the firm should call the bank immediately to notify the issues.
Although the adjustment will be shown in future bank statements, the disparity is reconciled in the current bank reconciliation period.
Ensure that the Balances are Equal
There should be no discrepancies between the cash book and bank statement once all differences have been accounted for.
It’s important to make a bank reconciliation statement that shows how your company’s internal records and the bank account are different from each other.
Important Note: GAAP refers for “Generally Accepted Accounting Principles,” and many sectors have embraced it.
It establishes specific rules and processes, like account reconciliation, that businesses must adhere to to demonstrate that their finances are healthy.
Reasons to Reconcile Bank Statements
Bank reconciliation is a critical process for any business. The main purpose of reconciling your bank statement for small businesses is to guarantee that your business’s recorded balance and the bank’s recorded balance match up. It also aids in the management and monitoring of your cash flow.
Other reasons why firms should balance their bank statements each month include:
When reconciling transactions in your bank account, look for signs of fraud first. Have any of the checks you’ve issued been duplicated or altered? Were checks written without permission? Were there any unlawful withdrawals from the account? Is there any money missing from the account?
Safeguards the Company’s Funds
You may detect an amount deposit mistake owing to human error when reconciling your accounts. However, situations such as a cash shortfall while dealing with other firms are avoided if the accounts book is given adequate attention and a proper account reconciliation technique is followed throughout the month.
Verify the Financial Statements’ Accuracy
Although it is uncommon, banks sometimes make mistakes. To ensure that your financial statement matches your bank statement, one technique is to reconcile your bank statements.
It is Economical
This is one of the most appealing characteristics that is seldom overlooked, as everyone is seeking for innovative ways to manage and save money, especially while running a business.
Reliable Tax Reporting
It would help if you reconciled your bank statements to compile a valid tax return.
Reconciling your bank statements might help protect your organisation from theft by workers or others.
Why do you Need to Reconcile your Bank Accounts?
Bank reconciliations are an important internal control tool that can help prevent and detect fraud. They also aid in the detection of accounting and banking problems by explaining the disparities between the cash balances on the accounting record and the bank balance position on the bank statement.
Can a Reconciliation Assist me in Preparing my Taxes?
While reconciling your accounts will not mechanically result in a refund but the procedure of associating your financial records can be quite helpful in identifying company costs that may be deducted on your tax return.
What are the Advantages of Reconciling your Accounts?
The following are some of the advantages of account reconciliation:
- Safeguards the company’s funds
- Prevents accounting errors
- Makes it easy to pay payments
- Assist in the detection of shady dealings
- It is economical.
So, this was the whole process of what does reconciling an account involve.
Your accountant will be able to provide dependable, accurate, and high-quality financial statements if you reconcile accounts and compare transactions.
It is critical to ensure that your company’s financial records are adequately reconciled because your firm’s balance sheet reflects every dollar spent, whether it was paid for outright or through credit or loans, and every item purchased with that money.