Why is Reconciliation Important in Accounting?

What is reconciliation? Well, to start with, it is rather an important aspect of our bookkeeping and is just as important as the rest of the accounting process. Essentially, this is the fundamental process that ensures that the money spent or earned ‘tally’ precisely with the money that is leaving or entering the account by the end of the fiscal period. This is an important aspect for businesses and also individuals as it offers the opportunity to ‘weed out’ the fraud activity and also to prevent financial statement errors. It has been advised to conduct the process of Reconciliation at a regular period like monthly or quarterly as a part of the normal accounting procedure. Now let us take a look at Why Is Reconciliation Important in Accounting?

The Process of Reconciliation: How it Works

As mentioned earlier, it is recommended to undertake the process of Reconciliation at the end of the Fiscal month for your account. The process of Reconciliation comprises the verification of the fact that every transaction amounts to the right ending account balance finally. Here are the two ways to reconcile the account: To Review the documents and to Review the Analytics.

The Document Review

This is the process that deals with comparing the amount of every transaction with the amount that is shown as outgoing or incoming in the corresponding account. For instance, an individual retains all the credit card bills which are not recognised by them. The charges can be small, and there are chances that the individual overlooks them considering that they ‘might be’ lunch expenses. Now at the end of the month, when the transaction details are checked by the account holder in the credit card bill and tallied with the credit card receipts; they might discover that they do not have receipts of the ‘lunch in question’ that are very much present in the bill. 

As the individual in question here is fastidious about retaining the receipts, they might give a call to the credit call to inform them about the disputed amount. Once the investigation has been conducted, it has been discovered that the credit card has been compromised by the criminal that managed to obtain the company’s information and charge it over to the individual’s credit card. Thus, this individual is reimbursed for the incorrect charges, this results in the cancellation of the card and any further fraudulent activity is stopped.

Note: Reconciliation of the bank statement can help avoid bouncing the checks or when failing to make electronic payments to the partners and suppliers.

Read More-: Reset the Bank Reconciliation in Sage 50

The Analytical Review

This is yet another approach to review that can also reveal fraudulent activity or errors in the balance sheets. In this Review type, the amount is estimated by the businesses that should be within the account based on the previous account activity levels. 

For instance, five buildings have been purchased by a company ‘ABC’ per fiscal year according to the previous activity levels. As the company reconciles the accounts every year in order to check for any ‘funny irregularities’, and discovers that the estimated amount of the expected account balance shows something ‘Off’ by a significant amount. Now, for instance, according to the previous accounts activity, the estimate of the accounts payable should be somewhere around $5 Million. However, it has been found that the payable balance is $48 Million for the year. This is the major discrepancy within the balance sheet. 

The accountant of the company ‘ABC’ reviews the balance sheet and discovers that an extra zero has been entered by the bookkeeper, at the end of the accounts payable accidentally. The accountant adjusts the accounts payable to $4.8 million which is the approximate amount of the estimated accounts payable.

Reconciliation of Bank Accounts: The Benefits

As mentioned earlier, bank account reconciliation is one of the most important aspects of good account keeping. As, in the case of small businesses, the main aim of reconciliation of the bank statement is to make sure that the recorded balance of the business and the recorded bank balance ‘match up’. This helps manage and also monitor the cash flow in a streamlined manner. 

Now let us take a look at some of the main advantages of the process of Reconciliation:

• Fraud Identification: This is, perhaps the top priority for most people when considering the implementation of the process of reconciliation of transactions on your bank accounts. For instance, are the checks issued by you duplicate or changed? Have the checks been issued without an authorisation? Have there been unauthorized transfers out of the accounts? Have there been unauthorized transfers out of the account? Do you notice any missing deposits from the account in question?
• Validation of the Data Entry: Reconciliation of the bank statement ensures that any irregularities are well-identified. This includes the likes of entering wrong amounts, duplicated entries, and other data entry errors.
• To Confirm the Accuracy of the Financial Statement: Though quite rare, there are cases when the banks make such mistakes. Reconciliation of the Bank statement is one of the ways to confirm if the financial statements match the bank’s statement.
• Accurate Tax Reporting: In order to be able to generate accurate tax returns, you need to ensure that you reconcile the Bank statements.
• Theft Controls: Reconciliation of the bank statement can also control or prevent other individuals and people from driving questionable amounts from the company. The process of reconciliation of bank statements can ensure that you identify any ‘funny’ and suspicious movements in the transactions, that could be fraud or theft or accounting errors. This process can be done either formally or informally. While this is true in the case of both individuals and businesses, it is necessary that each transaction has been verified individually, hence ensuring that the amounts match precisely. If this does not happen, then you need to make notes of the differences and further investigate the error.

When You do not Reconcile the Bank Statements

Now let us take a look at the consequences of what happens when you do not reconcile the Bank Statement. Essentially, there are chances that any differences in the accounts and amounts can be ‘overlooked’ or go undetected if the reconciliation is not done. Hence, with the process of reconciliation, one can be sure of identifying the problems before they spiral out of control. 

However, most importantly, the process of reconciliation of the bank statement ensures that any fraud is recognised before they skip out of hand. Also, it is important to bear in mind that consumers have more protection within federal law when it comes to bank accounts than businesses. Hence it is especially important in the case of businesses to be able to detect any fraud or ‘shady’ activity in the account. This is especially important as it becomes very tough or uncertain for the banks to cover the error once they are long done.

Also Read-: Enable Bank Reconciliation in Sage 50

Conclusion

So you see, bank reconciliation is an important aspect of account keeping. It implies the comparison of the internal financial records with the records that have been recorded by the banks. The process is essential as it makes sure that any unusual transactions are recorded as they can be caused due to fraud or accounting error. Aso, in business terms the process of Bank Reconciliation goes a long way in the proper management of cash flow and recognising any inefficiencies.

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