Reconciliation is the process of making sure your accounts ‘add up’. It’s an important way of checking that your costs and sales have been recorded correctly and will help you manage cash flow, spot errors and complete your end of year statements.
How is it done?
Reconciliation involves data matching – verifying that your own records for transactions are consistent with any external documentation given to you, for example from customers or suppliers.
You can either do this the old fashioned way using a spreadsheet or a written table to ‘balance the books’. However, now there are many software products or apps that will do the hard work for you – automatically matching transactions up.
Does it have to be done?
In short, yes. As well as being a best practice to evidence your transactions, it will provide a sound audit trail as part of your end of year financial statement – something all businesses must produce. Done properly, reconciliation will ensure your accounts stand up to any financial scrutiny.
What needs to be reconciled?
The main data you will need to look at are:
– bank transactions – this is usually straight-forward to evidence transactions in your cash account using your bank or credit card statements, or online transaction history linked through any accountancy software you use.
– customer transactions – this process will compare the details of each individual transaction in your accounts receivable with the summary in the receivables control account. This is a good way to spot any discrepancies in payments. Your accounts receivable ledger should record all related invoice and payment details whereas the control account provides the summary.
You can make sure you are producing invoices correctly in our guide here.
– supplier transactions – you will need to use statements provided by your suppliers to tally up the balance owed with your transactions payable. You may need to request documentation from your suppliers from time to time if they’re not provided as a matter of course.
You may also have to reconcile other costs, income or financial movements, depending on the nature of your business.
This might include a stock-check to evidence the value of assets, or provide receipts showing one-off cash transactions.
If your business if part of a group of businesses and money moves between companies, you will need to ensure that this is shown and reconciled in the accounts of both businesses.
What should the process be?
In basic terms, reconciliation involves:
– Outlining the time period your reconciliation will cover.
– Getting hold of all the financial reports that you need – this should be much easier if you are using accounting software.
– Checking that the account being reconciled agrees with the closing balance of the external document it is being reconciled against.
– Checking your record of all new transactions such as invoices paid, charges and interest against your external documentation. Again – this is usually easier if you are using software with a ‘reconciliation’ function.
– Checking for legitimate discrepancies. This could include transactions that have been mistakenly recorded twice, are missing from your records or have been cancelled and not removed.
– Producing a reconciliation report which quantifies and explains any reasons why there are still any discrepancies between the balances of the external documentation and your own accounts.
When should I do my reconciliation?
There’s no set timeframe for reconciliation. In difficult times, a small business may reconcile their cash accounts daily, and larger companies may only look to do reconciliation every month or less frequently – it very much depends on your business.
However, getting into the habit of reconciling accounts regularly will stand you in good stead to stay on top of your finances and spot any issues quickly.