What is Reconciliation in Accounting?

 Financial statements give an overview of a company's financial condition. They provide a high-level overview of a company and indicate its profitability, solvency, and liquidity. However, these indicators are only useful if thorough account reconciliation is performed.

The account reconciliation process is an important component of business since it connects accounting with bank statements, records with cash, and protects the company from any errors.

However, few business owners are willing to perform a bank account reconciliation on their own. They have valid grounds for feeling this way. Prior to the advent of account reconciliation software solutions, reconciling entailed comparing a plethora of daily transactions to bank statements. Completing the account reconciliation procedure manually and in one sitting has always been challenging because paper records are quickly lost and often difficult to replace.

What exactly is account reconciliation?

Account reconciliation is a significant accounting activity that compares financial records to an actual bank balance to guarantee that the statistics are fully balanced. It's not always a simple procedure, but it's critical to your company's success.

Account reconciliation is typically performed at the end of an accounting period to confirm that the general ledger account balance is complete and accurate.

Checking account reconciliation typically necessitates the matching of two sets of data. The first is provided by a business owner's records (cash book), whereas the second is created by a third party, such as a bank (bank statement). When you compare these two reports, you should find no difference – this signifies they have the same value on a certain date.

What is the purpose of account reconciliation?

The account reconciliation procedure keeps your company's finances and various regulatory needs on track. You must understand where your money is going, how much you have remaining, and what you must do with it.

Account reconciliation is vital since it allows you to confirm that your financial data are correct. If they aren't, you may need to make adjustments. This way, you'll get the most recent and up-to-date information about the financial health of your organisation.

Furthermore, proper bank account reconciliation reduces the chance of collecting fines or penalties that could otherwise be avoided.

What causes variations in the account reconciliation process?

Differences discovered during account reconciliation are referred to as discrepancies. Account reconciliation is the process of ensuring that all transactions have been accounted for. This could be due to a human error or the corporation using the incorrect set of standards to account for their transactions. Whatever the reason, if these errors in account reconciliation go undiscovered, they can do considerable damage to your firm.

The following are the most prevalent causes of account reconciliation discrepancies.

Differences in timing

There is a possibility that the transactions have been recorded in the general ledger but the check has not yet been cleared by the bank, or vice versa.

Omissions

This account reconciliation difference is due to transactions that show on the bank statement but have not yet been entered in the cash book by the firm.

Mistakes

Mistakes typically occur when the account reconciliation procedure fails. Most of the time, this occurs as a result of incorrectly recorded activities.

How to Consolidate Accounts

The account reconciliation procedure is critical for a variety of reasons. First and foremost, it can aid in determining whether a potential error in the accounting process has occurred. Furthermore, it can identify accounts that need to be reconciled. Here's a rundown of how to perform account reconciliation to guarantee that your company's financial situations remain accurate.

Step 1 of the Account Reconciliation Process: Checking the General Ledger

First and foremost. The Croydon accountant must look over all of the accounts in the general ledger to ensure that there are no missing transactions and that the balance is correct.

Step 2 of the Account Reconciliation Process: Comparing

The accountant must next compare the balance in the general ledger with data from independent third-party systems or other supporting paperwork to ensure proper account reconciliation (bank or credit card statements).

Step #3 of the Account Reconciliation Process:

Eliminating Discrepancies If Any Occur Next, the accountant analyses the gathered information and takes necessary remedial actions to eliminate any discrepancies that appear.

Step 4 of the Account Reconciliation Process is to create the relevant journal entries.

If any differences were discovered during the previous phase of account reconciliation, balance errors should be addressed and noted in special journal entries.

Step #5 of the Account Reconciliation Process: Post the Journal Entries

That's it! The journal entries are now ready to be published. Following this step, the general ledger for the reconciliation period will be updated.

After reading the post, if you have any questions about accounting in Croydon, please do not hesitate to contact Cruseburk Accounting Services.