The word reconciliation originates from the Latin word reconciliatus, which means to bring together again. It carries with it a sense of harmony, a promise to mend that which is broken and to restore order from chaos.
In the realm of finance, it is a term of growing importance, denoting the art and science of aligning disparate financial records and bringing them into accord.
So, in this article, we dive deeper into:
- Financial reconciliation: What’s the term all about?
- Why do you need financial reconciliation?
- 5 Types of financial reconciliation
- Step-by-step process to reconcile financial statements
- Why does automating financial reconciliation play a bigger role?
- Simplify reconciliation by consolidating data with Bluecopa
Let’s begin the journey.
Financial reconciliation: What’s the term all about?
Financial reconciliation ensures your business’s financial records are reliable. It’s a repeatable activity and is actively applied to multiple sources of financial information within your business. It compares independent and third-party financial records and statements with internal records and ledgers.
If these records do not match, leaders can figure out what’s been cooking. The underlying reasons can be intentional or unintentional. In the former, differences might have been raised due to missing invoices or unrecorded transactions. In the latter, the reasons may be misused funds.
Fundamentally, financial reconciliation verifies whether:
- A business is being properly credited for income received
- The money that leaves the business matches the known payments made
💡 Financial reconciliation is a process of verifying the accuracy of a business's financial data by matching it with the corresponding source documents and records that belong to external entities such as banks or vendors. These source documents may include invoices, receipts, and transaction statements. The purpose of financial reconciliation is to ensure that all the recorded transactions are accurate and complete and to identify any discrepancies that need to be resolved.
Why do you need financial reconciliation?
Below are some of the key benefits of financial reconciliation:
Identifying and correcting errors
Financial reconciliation can help businesses to identify and correct errors in their financial data. This can include data entry errors, bank account errors, omissions, lack of information, duplication, and other types of errors. By identifying and correcting these errors, businesses can improve the accuracy of their financial statements and make better business decisions.
Financial reconciliation can also help to prevent fraud. By comparing two sets of financial data, businesses can identify any discrepancies that may indicate fraudulent activity. For example, financial reconciliation can help businesses to identify duplicate checks, unauthorized credit card activity, and altered invoices. By preventing fraud, businesses can save money and protect their reputation.
Ensuring the accuracy of financial statements
Financial statements are the foundation of a business's financial reporting. They provide information about a business's financial performance and position to investors, creditors, and other stakeholders. Financial reconciliation helps to ensure that financial statements are accurate and complete. This is important for maintaining investor confidence and complying with financial regulations.
Complying with financial regulations
Many businesses are required to comply with financial regulations set by government agencies and regulatory bodies. Financial reconciliation can help businesses comply with these regulations by ensuring that their financial records are accurate and complete. For example, publicly traded companies are required to comply with the Sarbanes-Oxley Act, which includes requirements for financial reconciliation.
Preparing for tax filings
Financial reconciliation can also help businesses to prepare for tax filings. By ensuring that financial records are accurate and complete, businesses can reduce the risk of errors in their tax returns. This can help to avoid tax penalties and interest charges.
5 Types of financial reconciliation
Financial reconciliation comes in various ways—
#1 Bank reconciliation
Bank reconciliation is the process of comparing a company's bank statement to its accounting records to ensure that the two balances match.
💡 Example: A company's bank statement shows a balance of $100,000 at the end of the month, but the company's accounting records show a balance of $105,000. The company would need to investigate the difference to determine why the two balances do not match. Possible explanations include outstanding checks, deposits in transit, and bank fees.
#2 Vendor reconciliation
Vendor reconciliation is the process of comparing a company's accounts payable ledger to its vendor statements to ensure that the two balances match.
💡 Example: A company receives a vendor statement from a supplier that shows a balance of $10,000. The company would then review its accounts payable ledger to see if the balance matches. If it does not, the company would need to investigate the difference to determine why. Possible explanations include unpaid invoices, invoices that have been paid but not yet processed by the vendor, and vendor errors.
#3 Business-specific reconciliation
Business-specific reconciliation is the process of reconciling any account or transaction that is specific to a particular business.
💡 Example: A retail company may need to reconcile its inventory records to its accounting records to ensure that the two balances match. A restaurant company may need to reconcile its food and beverage costs to its accounting records.
#4 Intercompany reconciliation
Intercompany reconciliation is the process of reconciling the accounts of two or more related companies. This is typically necessary for companies that have multiple subsidiaries or divisions.
💡 Example: A parent company may need to reconcile its accounts receivable balance with the accounts payable balance of its subsidiary. This is to ensure that the two companies are properly recording their intercompany transactions.
#5 Customer reconciliation
Customer reconciliation is the process of comparing a company's accounts receivable ledger to its customer statements to ensure that the two balances match.
💡 Example: A company sends out customer statements at the end of each month. The company would then review its accounts receivable ledger to see if the balances match. If they do not, the company would need to investigate the difference to determine why. Possible explanations include unpaid invoices, invoices that have been paid but not yet processed by the company, and customer errors.
Step-by-step process to reconcile financial statements
To reconcile financial statements, you will need to compare the balances in your accounting records to the balances in the supporting documentation. This may include bank statements, vendor statements, customer statements, and other records.
Here is a step-by-step process:
Step 1: Identify the accounts to be reconciled. This will typically include all of the accounts on the balance sheet, such as cash, accounts receivable, inventory, accounts payable, and long-term debt.
Step 2: Gather the necessary account information. This will include your accounting records and the supporting documentation.
Step 3: Compare the information. For each account, compare the balance in your accounting records to the balance in the supporting documentation.
Step 4: Investigate any differences. If there are any differences, investigate them to determine the cause. This may involve reviewing individual transactions, contacting vendors or customers, or reviewing bank statements.
Step 5: Make adjustments to the general ledger. Once you have investigated and resolved any differences, make the necessary adjustments to your general ledger.
Step 6: Repeat the process for all accounts to be reconciled.
Once you have reconciled all of the accounts, the balances in your accounting records should match the balances in the supporting documentation. This means that your financial statements are reconciled.
Why does automating financial reconciliation play a bigger role?
Automating financial reconciliation plays a bigger role for several reasons, including:
- Increased efficiency and accuracy: Automated reconciliation can save businesses a significant amount of time and effort. It can also help to improve the accuracy of the reconciliation process, as it reduces the risk of human error.
- Improved visibility and control: Automated reconciliation can provide businesses with better visibility into their financial data and help them identify and resolve discrepancies more quickly. This can lead to improved financial control and decision-making.
- Compliance: Automated reconciliation can help businesses to comply with financial reporting requirements. For example, many businesses are required to have regular audits of their financial statements. Automated reconciliation can help to ensure that the financial statements are accurate and complete.
- Reduced costs: Automated reconciliation can help businesses to reduce their overall costs. For example, it can reduce the need for manual labor and can help to reduce the risk of financial errors.
Simplify reconciliation by consolidating data with Bluecopa
Bluecopa consolidates data from all of a company's financial systems into a single, unified platform. This makes it easy to compare accounts and spot errors, even across multiple systems.
Bluecopa also provides many features that can help businesses improve the efficiency and accuracy of their reconciliation process, including:
- Automated reconciliation: Bluecopa can automatically reconcile a wide range of accounts, including bank accounts, credit card accounts, vendor accounts, and customer accounts. This can save businesses a significant amount of time and effort.
- Exception handling: Bluecopa can automatically identify and flag any exceptions or discrepancies in the reconciliation process. This helps businesses to focus their time and attention on the most important issues.
- Real-time reporting: Bluecopa provides real-time reporting on the status of the reconciliation process. This helps businesses to identify and resolve any problems early on.
Looking to get ahead with your reconciliation? Book a demo and see how Bluecopa can get you there.