Understanding account reconciliation in financial management

Once an organization gets to a certain size, its financial data gets scattered across dozens—if not hundreds—of sources. Add a complex organizational structure with subsidiaries in multiple jurisdictions, and suddenly a single monthly session of bookkeeping won’t cut it. That’s where account reconciliation becomes essential; double-checking transactions in your company’s general ledger against secondary sources.

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What is account reconciliation?

Account reconciliation is essential to ensure an organization’s books are accurate. Like many financial processes, it can be time-consuming and labor-intensive, but more than worth the effort.

Definition and basic concept

Account reconciliation is the process of ensuring your company’s general ledger is correct and balanced by comparing it against secondary sources. It assures finance and accounting teams that the books are complete and up to date during the close process. Best practice is to reconcile all general ledger accounts monthly—a significantly labor-intensive task which automation can expedite—allowing you and your teams to stay up-to-date faster.

Why account reconciliation matters

No financial leader is going to argue that having accurate financial statements is a bad thing. Not only is the accuracy of these statements necessary in some legal jurisdictions, especially for public companies, but it’s also essential for making better strategic decisions. Leaders rely on these statements—and the reports you create with them—to know exactly how to guide the business forward.

The importance of account reconciliation in financial management

The accuracy and integrity of your general ledger are essential to multiple aspects of your organization.

Why is account reconciliation necessary

On any given day, your organization’s general ledger can fill up with hundreds, if not thousands, of transactions. Some of these are manually added from departments that each have their own processes for doing so, while others are automatically inserted through integrations with the various tools your organization uses to manage day-to-day operations.

Account reconciliation standardizes these transactions by double-checking them against supporting evidence from secondary data sources. This ensures financial statements are accurate and helps maintain stakeholder trust in financial data.

Ensuring financial accuracy

Even a small error in your general ledger can have repercussions throughout the organization. A missed decimal here, a double charge there, and you’re suddenly dealing with inaccurate financial statements, incorrect forecasts, and inappropriate strategic decisions. Regular account reconciliation eliminates these errors before they become bigger problems.

Maintaining stakeholder trust

How likely are you to trust a report or statement with data that hasn’t been verified at least once? Account reconciliation creates that trust, ensuring both internal and external stakeholders know they’re looking at accurate data. If needed, reconciliation even allows you to provide secondary sources for stakeholders who want to do their own additional research.

Types of account reconciliation

While the account reconciliation process generally follows the same steps across different financial accounts, there are a few different types of account reconciliation that we’ll explore.

Conciliação bancária

Bank reconciliation is the most common form of reconciliation. Bank reconciliation is done by taking your bank statements and your business accounts and making sure they match.

Reconciliação de pequenas quantias

Because it’s easy to lose track of petty cash, this kind of reconciliation verifies that these cash accounts agree with receipts and other records of these transactions, an essential process to avoid errors and misuse.

Conciliação com fornecedores

A reconciliação com fornecedores é o processo de contas a pagar para garantir que suas despesas reais estejam de acordo com as faturas do fornecedor que você recebeu.

Reconciliação específica de negócios

Business-specific reconciliation is the comparison of your internal records at the start and end of your finance cycle—like balance sheet reconciliation. The frequency of this process depends on the type of business conducted, goods sold, or services provided. Financial services are often required to reconcile client accounts with client funds more frequently than other kinds of businesses.

Conciliação Intercompany

Intercompany reconciliation is the verification and balancing of transactions between companies and subsidiaries in the same corporate group.

Conciliação de cartão de crédito

Credit card reconciliation is the comparison of credit card statements against the company’s records.

The account reconciliation process: Step-by-step

Gathering necessary documents

Don’t make the mistake of kickstarting your account reconciliation without the right documents, thinking you’ll look them up as you run into discrepancies. Like a lawyer building their case, you should collect all relevant financial documents, compile all supporting documentation for recorded transactions, and double-check the accuracy of what they’ve gathered before you start checking transactions.

Comparing account balances

Before you start going through an account transaction-by-transaction, comparing the account’s total balance to a secondary source can quickly tell you if there are any discrepancies to investigate before diving in—allowing you to prioritize accounts according to how much work they’ll be to reconcile.

Once you’ve reviewed total balances, you’ll want to dive into each account, line by line, and compare transactions to the secondary sources and documents you’ve gathered.

Identifying discrepancies

As you analyze each account, you’ll find transactions in your general ledger that don’t exactly match the same transactions in your secondary source. You might even find transactions that aren’t represented in that source at all, meaning they were either entered in error or somehow didn’t register in that account or document.

You can either investigate individual discrepancies as they come up or identify them all to investigate them in a batch later.

Investigating and resolving differences

When it’s time to investigate a discrepancy, you’ll need to pull up all secondary sources and documents tied to that discrepancy. You’ll first want to eliminate the most common reasons for these discrepancies, such as:

• Data entry errors

• Foreign currency transactions

• Double charges

• Mismatched vendors

If you’ve eliminated these errors and still can’t solve the discrepancy, then you’ll need to investigate in more detail.

Saving documents

As you’re working through an account reconciliation, you’ll want to regularly save any documents you use and record your process. This is done for two reasons:

• Consistency: You want your account reconciliation process to be as consistent as possible every time to prevent errors. Ensure your process remains the same every time and the team involved in reconciliation always knows where to find necessary documents.

• Evidence: If anyone needs to double-check your work, they should know exactly what documents you used and where to find them.

Common account reconciliation methods

Método 1: Reconciliar com um demonstrativo financeiro, extrato bancário, extrato de cartão de crédito ou extrato de empréstimo

O exemplo abaixo é para uma reconciliação de cartão de crédito, mas as etapas permanecem semelhantes para um demonstrativo financeiro, extrato bancário ou extrato de empréstimo. É essencial que, além de juros e taxas, não haja itens não reconciliados nas declarações.

1. Colete e classifique recibos e relatórios de despesas. Tradicionalmente, isso era feito manualmente com recibos em papel e formulários de despesas, mas agora pode ser automatizado usando um software de gerenciamento de despesas.
2. Faça a correspondência entre as Transações e as declarações. Cada transação registrada no extrato do cartão de crédito deve ter seu recibo ou relatório de despesas correspondente com valores concordantes.
3. Resolva os erros. Nem todos os erros são intencionais ou maliciosos; às vezes, erros acontecem. Por exemplo, em um cartão de crédito, pode haver um reembolso solicitado por uma transação cancelada, uma taxa por falha na cobrança ou cobranças duplicadas acidentais. Se alguma discrepância for identificada por meio desse processo, certifique-se de notificar seu banco.

Método 2: Reconciliar com a atividade da conta

1. Compare o extrato bancário da conta com o extrato de caixa. Certifique-se de que todas as entradas estejam de acordo em ambas as fontes e anote todas as entradas que não tenham contrapartida.
2. Identifique pagamentos em um lado que não aparecerão como pagamentos no outro. Isso pode incluir cheques e transações em caixas eletrônicos no lado do livro-caixa e encargos de serviço, saques a descoberto e tarifas no lado da conta.
3. Combine as transações que aparecem em ambos os registros. Se houver algum que não tenha uma entrada apropriada no outro registro, adicione-o.
4. Verifique se há erros no extrato da conta bancária. Erros bancários são raros, mas é essencial notificar seu banco assim que algum for identificado. A correção aparecerá então em declarações futuras, mas precisará ser equilibrada agora para completar a reconciliação deste ciclo.
5. Verifique se os saldos estão de acordo. Uma vez que todas as discrepâncias e erros tenham sido resolvidos e equilibrados, ambas as afirmações devem agora concordar. Quaisquer discrepâncias devem ser relatadas e explicadas.

Método 3: Reconciliar com a atividade do subledger

1. Like the previous methods, start by comparing general ledger entries against the subledger and identify any discrepancies. Pay close attention to any non-recurring transactions, since these are the most likely entries to have errors. Other common issues are duplication errors, entries in the wrong account, and transposition errors.
2. Combine as entradas em todos os livros. Certifique-se de que cada entrada tenha sua contraparte no outro livro e que os valores estejam de acordo. Anote quaisquer erros.
3. Investigue os erros. Depois que os erros forem identificados e compreendidos, tome as medidas apropriadas para resolvê-los e garantir que sejam inseridos corretamente nos dois livros.
4. Compare e ajuste os saldos. Se todos os ajustes e correções tiverem sido concluídos, os livros contábeis agora devem concordar.

When to use each method

If you have access to clear statements that have the transactions you need to verify, then the first method will generally be the one you use since you’ll have the most accurate data. When that information isn’t available, then you’ll want to compare the financial account the discrepancy comes from with the general ledger. While the account may not have receipts or other specific documentation, it’s generally a good source of information for reconciliation.

If you need to see the transaction within the context of multiple accounts—or you need to find a transaction that was attributed to the wrong account—then you’ll want to use the subledger activity method instead.

Causas das discrepâncias na reconciliação de contas

As discrepâncias que você encontrará durante uma reconciliação podem ser agrupadas em quatro categorias: erro humano e erros, diferenças de tempo, dados ausentes ou incompletos ou Fraude.

Erro humano e erros

Human error can’t be completely eliminated from any finance process, and that includes reconciliation. Here are some common errors to watch out for:

• Business-side errors: Mistakes in recording transactions, such as omissions or wrong entries in the cash book, contribute to differences between balances. This can sometimes be attributed to using manual systems, like spreadsheets, to record transactions versus dedicated software.

• Bank-side errors: Though rare, errors made by the bank in recording transactions, like omissions or inaccuracies, are not impossible and can lead to disparities between book balances.

Diferenças de tempo

Timing differences can impact both check-based transactions and automated deposits.

• Cheques: Because of the potential delays when dealing with cheques, they are a frequent cause of reconciliation issues. Any cheques issued by the bank but not yet deposited, or paid into the bank and not collected, will result in discrepancies.

• Automated debits, credits, and deposits: Any automated process that the bank handles on behalf of the business can cause the accounts to change without any note made on secondary sources. This includes direct debits and credits made by the bank on behalf of the customer, any payments the bank handles on your behalf like rent or utilities, direct deposits, interest, dishonored items, and dividends.

Dados e transações ausentes ou incompletos

Nem todos os departamentos operam com o mesmo rigor, e sua equipe financeira pode ter que lidar com dados ausentes ao reconciliar contas. Felizmente, essas discrepâncias geralmente são fáceis de detectar; você simplesmente não encontrará um registro correspondente para a transação que está tentando reconciliar. Infelizmente, conciliá-los pode ser complicado e geralmente envolve entrar em contato com o departamento responsável pela discrepância.

Fraude

Account reconciliation is an important part of fraud prevention since it allows the finance team to take a fine-tooth comb to every financial transaction. This kind of close observation will usually reveal the issue and allow you to investigate further.

Challenges in account reconciliation

Account reconciliation, at its core, is a process that requires your organization to go through every single transaction to match it with supporting evidence from another source. Then, if there are any discrepancies, they need to be resolved. Resolving a single discrepancy can be as simple as fixing a decimal or as complex as pursuing a case of fraud—often involving lawyers and months of work.

Two aspects of account reconciliation can make it particularly challenging.

Time-consuming manual processes

Account reconciliation often involves time-consuming manual processes, from manual data entry to manual reviews. All of these are subject to human error. These errors can end up causing their own discrepancies, requiring more manual work to fix.

Time is a factor here, as well. The more you rely on manual processes, the more time account reconciliation will take.

Dealing with high volume transactions

The more transactions your organization has to sift through, the longer account reconciliation will take, and the more likely someone is to make an error. If these transactions are spread out over dozens of data sources, then this challenge is exacerbated.

Benefits of regular account reconciliation

Regular account reconciliation ensures you pick up on discrepancies before they have a chance to balloon up into larger issues. This leads to better financial reporting, enhanced cash flow management, and better decision-making across the organization.

Improved financial reporting

Accurate financial reports are essential for ensuring your organization makes the most of every dollar. Regular account reconciliation eliminates errors and highlights inefficiencies, leading to better reports.

Enhanced cash flow management

Cash is king and properly managing your cash flow keeps the lights on. Since account reconciliation will cover all your cash transactions, you’ll have a better understanding of how cash flows in and out of your organization.

Better decision-making

For an organization to succeed in the long term, it needs leaders who make decisions based on data, not just their gut. But that data needs to be accurate. With account reconciliation, you can prepare accurate financial statements leaders can rely on for those big decisions.

How account reconciliation software gets you these benefits

If every step of your account reconciliation process relies on manual effort, you’re unnecessarily increasing the time and resources needed to complete it while introducing the risk of human error.

The right account reconciliation platform can save you tons of time, eliminate the risk of human error, and dynamically produce financial reports that are more accurate and easier to navigate. The best option on the market right now? Prophix One.

Prophix One is a comprehensive financial performance platform that handles everything from financial close to intercompany management and account reconciliation. Use robust automations to get the data you need exactly where you need it, improve data accuracy, and increase visibility on financials across the organization.

Want to see what Prophix One can do? Get a demo here.

How to choose account reconciliation software

When choosing the right account reconciliation software for you and your business, there are numerous questions to consider. Here are five to think about:

1. Does the software integrate with your existing financial and ERP systems, and accounting software? This will reduce data quality inconsistencies.
2. Este software tem os recursos de automação que você deseja? O objetivo final é reduzir a chance de erro humano afetar seu fechamento, portanto, quanto mais robusta for a automação, melhor.
3. Will this software require significant onboarding or is it intuitive enough for most people in your team to understand? Sophisticated software does not have to have an indecipherable interface. Effective and familiar design along with comprehensive documentation and support will help your financial teams get more out of the platform sooner.
4. Quão seguro é o software? Ele tem medidas de segurança apropriadas, como criptografia e controle de acesso seguro para proteger seus dados?
5. Will the software provide real-time visibility into the processes it will be handling, and will it provide your financial teams with adequate tracking and monitoring tools? Does it also provide compliance and auditing capabilities?

Key Performance Indicators (KPIs) for account reconciliation

Every time you reconcile financial accounts with your general ledger, you should be tracking KPIs to know just how effective your process is. Here are the KPIs you should be paying close attention to.

Reconciliation cycle time

How long does it take to reconcile a single account? That’s what’s communicated with this KPI, usually in hours. You can also track the amount of time needed to fully reconcile your entire general ledger.

Error rate

How many errors pop up per total number of transactions in your reconciliation? Expressing this as a percentage can help you compare different reconciliation methods to see which one is closest to being error-free.

Matching rate

What is the percentage of transactions that can be accurately matched with transactions in secondary sources? Tracking this KPI will help you determine if the measures you’re taking to improve accuracy across accounts are working or not.

Regulatory compliance and account reconciliation

Depending on several factors, like where your organization is located or if it’s publicly traded, your financial disclosures and processes will have to meet certain regulatory requirements. Here are just a few examples.

SOX Compliance

The Sarbanes-Oxley Act (SOX) is an American act covering financial disclosures for public companies. Producing accurate financial records is essential for complying with this act, and all financial statements have to meet certain formatting and transparency requirements. Regular account reconciliation is essential to producing accurate statements in compliance with SOX.

GAAP Requirements

Generally Accepted Accounting Principles (GAAP) include several requirements when it comes to bookkeeping and account reconciliation, such as double-entry bookkeeping and how to reconcile subsidiaries into a parent company’s financial statements. Reviewing these requirements—or using software with these requirements built into it—is essential for compliance.

Easier account reconciliation with finance technology

The right technology can simplify your close processes with comprehensive automation, streamlined transaction matching and minimized manual effort. The right financial performance platform makes reconciliation easier and more efficient. By avoiding human error, eliminating manual work, and ensuring your process complies with regulatory requirements, the right financial performance platform can make account reconciliation a breeze. Find out how to choose the right financial performance platform for you in our buyer’s guide.