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Dealing with bankruptcy, fraud or theft due to lack of proper reconciliation doesn’t have to be part of your work life.
Account reconciliation is vital for businesses to document or prove their account balance. Regular account reconciliation helps to find discrepancies in transactions, if any, and is a key part of detecting and preventing financial fraud.
These discrepancies (or “breaks”) are then investigated and the requisite corrections are done in the accounts.
If you want to understand account reconciliation, it is a good idea to start with the types of reconciliation.
Table of Contents
Introduction to Reconciliation Types
Account reconciliation is a process that confirms that two sets of records are in agreement. Furthermore, it makes sure that the general ledger (GL) accounts are complete, accurate and consistent. Sometimes, lack reconciliation or improper reconciliation can have severe consequences.
What are the Types of Reconciliation in Accounting?
There are many types of reconciliation in accounting. However, we will cover only the most common ones, which will likely be helpful to your organization.
1. Bank Reconciliation
Bank reconciliation, also called bank account reconciliation, is the process of matching relevant company data from the cash account with transactional data from a bank statement.
This is done to verify that every transaction in the bank statement agrees with the company’s internal records. This helps to track accounts payables and receivables and identify fraud and theft.
Sometimes, this process can become complicated due to time differences when transactions are recorded in the company and in the bank. Other complications may arise from differences in data formats and currencies, as well as large transaction volumes.
Depending on the volume of transactions, companies may choose to conduct bank reconciliations on a monthly, weekly or daily basis. If you are planning to do this weekly or daily, we recommend hiring bank reconciliation services so that your internal account team isn’t overwhelmed.
We have written about bank reconciliation in-depth, if you want to know more.Bear in mind that accountants can also receive fragmented data and incomplete information, which leads to guesswork, which leads to more missing information, errors, and larger problems.
2. Credit Card Reconciliation
This process is quite similar to that of bank reconciliation. It refers to matching internal financial records with transactions in a credit card statement. Often there are multiple steps involved, and usually it is the variety and volume of the sources that hinders the process.
Note that if the credit card company has made any error, this should be immediately reported and corrected.
3. Vendor Reconciliation
Vendor reconciliation matches the payable ledger’s transactions and balance with the balance owing on supplier statements. It makes sure there are no mistakes or discrepancies in the amount charged by the vendors.
Lack of account reconciliation can lead to you overpaying your vendors. To start with vendor reconciliation, you will need to get from the vendor a statement of account that has invoice-wise details of each transaction.
4. Balance Sheet Reconciliation
Balance sheet reconciliation is possibly the most important part of the period-end close for an organization, especially those that are multi-national, public, or in highly regulated industries.
It consists of verifying the integrity and accuracy of all relevant account trial balances. This is done by explaining each balance, and, if needed, substantiating it with further entries, explanation notes, and document attachments.
There are often sub-ledgers involved (which explain the trial balance) that might be available in different data formats. This is accompanied by the need for auditability of records and operations, since balance sheet reconciliations of public companies are subject to government regulations.
5. Customer Reconciliation
Also called accounts receivable (AR) reconciliation. Here, an entity compares accounts receivable as entered in the GL with outstanding customer bills or balance. The customer reconciliation ensures that there is no material inaccuracy in the company accounts.
Typically, as part of closing activity, AR reconciliation is conducted at the end of the month, before a company issues monthly financial statements. Any irregularities should be rectified before preparation of these financial statements.
6. Inter-Company Reconciliation
This is a process in which a parent company eliminates intercompany flows by consolidating the GLs of its subsidiaries. It identifies disagreements between subsidiaries because of mistakes in invoicing and other transactions like interests, deposits and loans.
This is important for several reasons:
Normalizing an increase in liabilities, assets, expenses and income of group companies arising from intercompany transactions.
Identifying unrecorded transactions or balances.
Minimizing bank transaction fees, reducing currency and financial costs, optimizing liquidity, and reducing risks.
7. Business-Specific Reconciliation
Each company will need to prepare other reconciliations based on particular needs. An example of this would be cost of goods reconciliation.
An organization that possesses any kind of inventory should make a reconciliation statement to match balances on the cost of sold goods. You can use two methods to calculate this:
Cost of goods sold = Sale – profit
Cost of goods sold = Opening stock + purchases – closing stock
These two methods should give you the same amount. If they do not, investigate records to determine the reasons for the imbalance.
We hope that this article has given you a clearer view of the different types of reconciliation.
If you don’t want to burden your own accounts team with the task of reconciliation, NextGen Accounting is just a click away. We offer credit card reconciliation services and bank reconciliation services, and do a custom setup for every client free of charge. Furthermore, our management team has decades of experience and includes former executives of Barclays Bank, Bank of America, and ICBC.
NextGen Accounting was founded with your challenges specifically in mind and is dedicated to providing a seamless experience. Contact us today for reconciliation services!