Account Reconciliation Best Practices

Dimitri Raziev17 Jan 202410 mins
Account Reconciliation Best Practices

How can you be sure of the amount of cash to be recovered from your customers when you have multiple sources of information? Reconciling financial data (sales, trade receivables balances, etc.) between accounting and operational business tools is a significant challenge when managing trade receivables and cash flow, two thorny issues for finance departments. In addition to cash management, regular and controlled reconciliation is necessary to meet internal control and fraud management challenges. Reconciliation problems often reveal other issues within a company. For example, mismatches between accounts indicate a lack of synchronised interfaces between IT tools or, worse, ineffective interfaces.

What should you do when you notice discrepancies? The bank account reconciliation process involves checking that all the transactions recorded on the bank statement (General ledger account) are correct. There is no point in making cash flow and customer collection projections based on unreliable accounting and management data or even calling customers for collection if the amounts due are not sure. 

Depending on the activity and internal organisation of the entities, management of the customer repository and invoicing can be handled by management software. Therefore, the accounting translation of transactions (invoicing, entry of payments, etc.) may be based on data from this operational management tool. Accordingly, reconciliation is sometimes complex and time-consuming because of the software in place, but it is essential. In this article, we’ll look at the different aspects of reconciliation, its pain points, its requirements, and the prospects offered by technology in this area.

I- What is reconciliation in accounting? 

What is the definition of bank account reconciliation? What does it involve? The bank account reconciliation process is an accounting process that consists of checking that all the transactions entered on the bank statement (General ledger account) have been correctly recorded.

It is essential for comparing your company’s accounts. A bank reconciliation in accounting is a highly recommended check to ensure that bank statements match accounting transactions.

To ensure that their accounts are properly kept, accounting reconciliation enables companies to ensure that the accounting transactions recorded contain no errors or omissions.

Accounting reconciliation is the accounting process that compares the company’s bank account (the general ledger account) with the account statements issued by your bank every month.

It reconciles an amount in the company’s accounts with its accounting document (invoice, bank statement, cheque stub, etc.). Beyond the simple verification function, accounting reconciliation serves to regularise a potential discrepancy and rectify any errors identified in the financial statements.

Accounting reconciliation is time-consuming, requiring a detailed study of each transaction. However, today’s accounting software has the functions to carry out this task almost automatically.

II- Why is bank reconciliation necessary? 

You can use an accounting reconciliation to verify that your company has accurately entered all generated transactions into its accounts.

This operation aims to identify potential errors and omissions in your company’s financial statements. It may involve :

– A transaction recorded in the accounts but not shown on the bank statement;

– A transaction that appears on the bank statement but is not recorded in the accounts;

– an error in the amount

– an accounting entry error (an accounting transaction credited instead of debited or vice versa).

Regular accounting reconciliation enables you to monitor the expenditure incurred and highlight the most significant expenditure items. Moreover, late processing of invoices can also be costly for your company, jeopardising the good relations you’ve established with your customers and suppliers. Indeed, missing invoices may have been lost through your fault or that of your suppliers. These minor inconveniences affect your cash flow and will likely damage customer relations and your decision-making; it is difficult to forecast, plan and make decisions based on inaccurate, outdated data. 

Besides, account reconciliation can also help identify potential fraud attempts. According to a 2018 Association of Certified Fraud Examiners (ACFE) report, most fraud is committed due to the lack of strong internal controls. Bank reconciliation can help you identify discrepancies between your accounts and your bank statement, preventing fraud. 

III- Before reconciliation: ensuring data’s reliability and consistency 

To perform the reconciliation in accounts, start by using updated exports (in Excel format) of the data to be reconciled from the two tools.

Before starting the account reconciliations, it is essential to check the reliability of various points relating to this data:

– Existence of invoice/credit note numbers

– Consistency of invoice and due dates (e.g. check that due dates are later than invoice dates, etc.),

– A correspondence (e.g., auxiliary code) enables the management and accounting tools to be reconciled, thus comparing the amounts allocated.

Secondly, stakeholders will need to identify, analyze, and justify reconciliation differences based on the standard correspondence between the two tools.

Sometimes, the time lag between accounting and business tools (e.g., a payment entered in the management system on the export date of the two tools with no movement in the accounting system) or the decorrelation of auxiliary codes (e.g., one or more auxiliary codes not corresponding between the two tools) can explain differences. Identifying these discrepancies must give rise to corrections in the accounting and management tools: reallocating settlements, recording ODs for lettering, etc.

If multiple entities within the same group handle the reconciliation work between accounting and management data, the process becomes complicated due to the heterogeneity of the software in place and internal processes. To make it easier for internal players to adhere to regular reconciliation, we must simplify and industrialise the reconciliation process by standardising processes, using relevant software to facilitate data comparison between entities, and implementing global strategies such as group cash flow forecasts.

IV- What is the process for performing an account reconciliation? 

How do you perform reconciliations in accounting? This operation compares the list of accounting transactions on the bank statement with the data recorded in your accounts. Therefore, you should carry out the reconciliation every month as soon as you receive your monthly bank statement. To correct the accounting records so that they coincide with the account statements. You should also do this before closing your annual accounts. On a micro level, there are several steps to take :

– Compare the bank statement with your bank account balance

– Cross-reference each entry in the accounts with the corresponding bank movements;

– Mark transactions that appear in the “Bank” account but not in the bank statement, and vice versa;

– Record transactions that have not yet been recorded;

– Check that the balances are identical.

However, three different stages emerge from this list of tasks at a macro level: 

Stage 1: Checking the balances. It involves verifying that the balance in your company’s accounts and the balance on the bank statement balance each other on the desired reconciliation date.

Step 2 involves “cross-referencing” the bank transactions with matching accounting transactions. The relationship between transactions may vary. Accounting transactions can also be reconciled in the same way as banking transactions.

Step 3: Analyze unreconciled banking and accounting transactions to take actions that will facilitate future reconciliation. Complete the bank reconciliation report afterward.

V- 3 methods commonly used by most companies to reconcile accounts:

Method 1 – Reconciliation with Excel

How does it work? The first choice of some companies is EXCEL spreadsheets, a well-known tool for performing a bank reconciliation.

Various versions of EXCEL spreadsheets are downloadable from the web. However, you need to be wary of the possibility of viruses. In most cases, a pre-established template is not suitable for your business. You can, however, create your own template from scratch. However, you will need the time and skills to develop a calculation model with reliable results. Reconciliation in EXCEL involves entering the bank and accounting balance on the date you wish to reconcile, then, after checking off the transactions between your account statement and your 512 (general ledger account), entering all the transactions with differences.

Your account reconciliation achieves a “balanced” status when the bank balance, accounting balance, and all transactions with differences sum up to zero. On the face of it, bank reconciliation with EXCEL seems to pose no problems.

However, a radical change in parameters occurs if the number of transactions to compare between several banks or accounts becomes too large. Traditional EXCEL approaches will focus mainly on tasks with little added value for employees. The use of this approach presents a significant and unsecured operational risk. Managing bank reconciliations can be complex and inefficient. According to a PWC report, 30% of your finance team’s time is spent on manual reconciliation. Even in top-quartile companies, analysts spend 40 per cent of their time gathering data, not analysing it.

Method 2 – Reconciliation with a chartered accountant

Another standard method is to delegate these manual tasks to a chartered accountant or accounting firm. This saves your team a considerable amount of time and makes the results of your bank reconciliation more accurate and reliable.

However, this solution also has its shortcomings. In particular, the cost of the accounting firm’s services remains very high. Moreover, the lack of real-time monitoring can prove problematic, reducing your control and flexibility over the project.

Reconciling your accounts by hand can be complex and time-consuming. You can use your accounting software if it includes reconciliation functions. Once you have updated the entries contained in your accounts or imported your bank statements, the software will quickly identify the source of the discrepancy between the balance in your “Bank” account and the statement provided by your bank. It is essential to detect any errors that may have been made quickly. Good to know: if you notice a mistake during the accounting reconciliation, you should correct your accounts and add any missing entries to account 512 “Bank”. The aim is to bring the balance of this account into line with the information in the bank statement.  

Method 3 – Reconciliation with dedicated software

To reduce the risk of errors and keep your cash flow healthy, account reconciliation software is a great tool to help you tackle late payments and data loss. The benefits are obvious: 

– Gain time by eliminating repetitive tasks and concentrating only on those that add value.

– Customer relations are smoother, thanks to regular, personalised follow-ups.

– More secure cash flow.

How does it work? By uploading your invoices quickly and easily to your account reconciliation software platform, the system automatically sends reminders to the corresponding customers, prompting them to make payments on your receivables. It also enables you to identify the highest-risk customers and thus anticipate potential delays by focusing on them and adapting your collection strategy.

Setting up a Robotic Process Automation (RPA) system will save you considerable time when reconciling your bank accounts. It will automatically associate each order, each invoice and each corresponding payment. You will spot any irregularities quickly and correct them within seconds. Paying a duplicate invoice or claiming payment from the wrong customer will be a thing of the past. 

By automating your bank reconciliation, you can eliminate human error and identify late payments more quickly. By accurately identifying these delays, you’ll be better able to focus on certain at-risk customers. As a result, your cash flow is also more secure.

Automating your account reconciliations also reduces the risk of fraud by clearly defining the process. Automating the process increases the difficulty of fraud, as the system automatically associates each invoice with its payment and defines each authorization in advance.

Moreover, this is the best way to identify and defend against cheque fraud. The system can now quickly detect blank, altered, and checks without an invoice. No more risk of theft, embezzlement or employee fraud!

Take away 

Bank reconciliation is a real way of ensuring regular monitoring of your bill payments and, therefore, your cash flow. By checking your transactions and bank balances in your accounts at a given time, you can compare them with the statement issued by the bank simultaneously.

This check enables you to identify the payment status of your invoices. It is, therefore, a key element in managing your financial flows.

In the age of digitalisation and the increasing dematerialisation of your processes (invoices, means of payment, etc.), investing in good reconciliation software to automate bank reconciliation might yet be the shortest way to success.