Updated: May 7
As the owner of a small business, you are solely responsible for ensuring that all phone numbers are correct at the end of the day. From spending budgets to employee salaries, your business dollars must add up. When your business needs to prove or record its account balance, this is called reconciliation accounting. In all the activities that drive your success, business accounting may be a difficult task, but this is the purpose of outsourced accounting services provided by Irvine Bookkeeping.
What is Reconciliation?
Reconciliation is an accounting process used to compare two sets of records to check whether the numbers are correct and consistent. The reconciliation also confirms that the accounts in the general ledger are consistent, accurate, and complete. However, in addition to business purposes, reconciliation can also be used for personal purposes.
Accountants use reconciliation to explain the differences between two financial records (such as bank statements and cash books). Any unexplainable differences between the two records may be signs of financial embezzlement or theft. Since the balances of assets, liabilities, and equity accounts are carried forward every year, account reconciliation is necessary. During the reconciliation period, you should compare the transactions recorded in your internal record-keeping account with external monthly statements from sources such as banks and credit card companies. The balance between the two records must be consistent with each other, and any discrepancies should be stated in the account statement.
Why you should reconcile your account?
Comparing transactions and balances is important because it helps avoid overdrafts on cash accounts, catch fraudulent or excess credit card transactions, explain time differences, and highlight other negative activities such as theft or incorrectly recorded income and expense entries. This saves your company from paying overdraft fees, keeps transactions error-free, and helps catch improper expenditures and problems such as corruption before they get out of control.
Two ways to reconcile an account
The following are the two main ways of reconciling an account:
1. Documentation review
Document review is the most commonly used method of account reconciliation. It involves bringing up the account details in the report and checking the appropriateness of each transaction. The recording method determines whether the amount captured in the account matches the actual expenditure of the company.
2. Analytics review
Analytical audit methods use estimates of historical account activity levels to reconcile accounts. It involves estimating the actual amount that should exist in the account based on previous account activity levels or other indicators. This process is used to find out whether the difference is due to a balance sheet error or theft.
The process of reconciliation
Compare your internal account register to your bank statement.
Check both the cash book and the bank statement for transactions that appear in both records.
Note all the payments recorded in the cash book that do not appear as payments in the bank account statement.
Check that all outgoing funds have been reflected in both your internal records and your bank account.
Make sure the balances are accurate.
If you, as a business owner, see that you cannot handle accounting on your own, consider hiring an accountancy service for contractors to help you with it.
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