What Is Account Reconciliation - Datarails (2024)

A company’s finances must be in order for it to run efficiently. Otherwise, executives cannot determine if they are earning a profit or loss. They don’t know which suppliers they’ve paid and how much. Without account reconciliation across a company, you have inaccurate and disorganized records that would only harm your business.

Account reconciliation is a common practice in stable financial situations. Reconciling your accounts is a great way to discover erroneous charges or financial irregularities on multiple bank accounts. Regardless of company size, accounts should be reconciled regularly. Doing this helps you understand your financial situation and where money is going. However, the process can be tiresome. So, here, we’ll tell you what it means to reconcile your accounts, the main types of account reconciliation, and the efficient way to do it.

What Is Account Reconciliation?

Account reconciliation compares third-party and independent financial statements and records with internal financial records and ledgers. Think of it like checking your work in Algebra class. Accountants perform account reconciliations to ensure that documents from all relevant sources are correct and complete. For example, you can determine the accuracy of your balance sheet through account reconciliation because you are checking the balance sheet against the bank’s records.

If the records don’t match, finance experts can investigate to find the reason and make changes where necessary. Discrepancies can occur either intentionally or unintentionally. Examples of unintentional reasons for differences are missing invoices or unrecorded transactions. For intentional discrepancies, you might find fake checks or misuse of funds.

It’s best to carry out account reconciliations regularly to ensure that the account balances displayed within your specified time frame are accurate. Doing this helps you detect errors or fraud early — or even avoid them. You can perform account reconciliations automatically, monthly, quarterly, or annually, depending on your business and the type of reconciliation you’re doing.

Types of Account Reconciliation

Account reconciliations come in various forms and can be for personal or professional use.

There are five primary types of account reconciliation: bank reconciliation, vendor reconciliation, business-specific reconciliation, intercompany reconciliation, and customer reconciliation. And they all help you keep your balances in order.

Bank Reconciliation

Bank reconciliation is the most popular type of account reconciliation. It compares transactions recorded in your ledgers to the monthly bank statements. Most transactions, including payments and earnings, are recorded by the bank. So, reconciling bank accounts can help spot discrepancies in checks issued or missing transactions.

Performing a bank reconciliation at the end of the month is valuable because it’s when the bank sends the company a statement summarizing the starting balance, transactions from the month, and the final cash balance. Reconciling monthly transactions helps organizations discover problems promptly and resolve them faster.

Vendor Reconciliation

Here, you reconcile your accounts payable records with statements provided by vendors and suppliers to ensure that the amount you paid for a product or service matches the amount received by the vendor. Unlike bank statements, vendors don’t always send in their reports, so you may need to request them.

When reconciling your accounts payable records, you compare the vendor’s statement to your ledger to determine if the charge matches the amount you paid. By helping to determine if the customer’s and vendor’s accounts are in sync, vendor reconciliation helps prevent conflict between a business and a vendor. When all records show the same transactions, it strengthens the relationship between you and your vendors.

Business-specific Reconciliation

For business-specific reconciliation, you compare internal records at the start and end of a financial cycle. You’re looking to see if the goods sold or services provided match your internal records. Each business’ need will dictate the specifics of this reconciliation. For instance, financial organizations are often required to produce frequent reconciliations of accounts with client-owned funds, one of the more demanding business-specific reconciliations.

Intercompany Reconciliation

Intercompany reconciliation is used by parent companies to unify all the accounts and ledgers from their subsidiaries. An intercompany reconciliation looks for mismatches within and between any two subsidiaries that may have resulted from billing errors involving loans, deposits, and payment processing activities. You can then rectify any errors in the company’s financial statement.

Doing this ensures that your records accurately reflect the company’s financial status. For example, most parent companies do this to confirm that there are no mistakes in invoices or loan records. Another reason for intercompany reconciliation is to identify which assets belong to which subsidiary.

Customer Reconciliation

Businesses perform customer reconciliation by comparing invoices sent to their accounts receivable ledger records. This process is valuable for companies that offer credit terms and options to their customers. Accountants in these companies can compare the amounts received to the amounts unpaid.

The customer reconciliation statement reveals mistakes or anomalies in the accounting for customers. Customer reconciliation is typically done at the end of the month, just before a business releases its monthly financial statements, as part of the account closing process.

Challenges With Account Reconciliation

Depending on the size of your business, there are multiple challenges you might face with reconciling accounts across your organization. Many of these challenges revolve around technical expertise and the number of records to reconcile.

Slow Processes

For many businesses, reconciliation is a time-consuming, tedious process. Small and large businesses alike often face issues with delays in receiving detailed statements from vendors and banks. Usually, banks use a specific file format. This means a user must employ various file formats, requiring them to first standardize files before uploading. Doing this requires time, and for big businesses with numerous transactions, it can quickly exhaust the resources of a financial team. Consequently, employees have less time in the day for other vital activities such as financial planning.

Human Errors

Companies with many employees and subsidiaries often struggle with consolidating large numbers of records. If you’re transferring data manually between databases, mistakes are more likely to occur. And the more steps in the process, the more likely the records are to have errors.

Each step of data processing, including downloading, uploading, checking for consistency in files, and record matching, has a chance of error. For example, you could download or upload an outdated file or reconcile the wrong accounts. As a result, you might overestimate your cash flow and cause an increase in the cost of future corrections.

Role Exploitation

One of the essential purposes of reconciliation is to identify fraud. But if you do not monitor these procedures adequately, corrupt employees may exploit them to conceal evidence of illegal activity within the organization. For instance, an employee in charge of performing vendor reconciliation could exploit their role or position to deliberately delete a record.

Too Many Tools

A bloated tech stack may work for a smaller company. But as the company scales, unpredictable consequences emerge. For example, a large company could have numerous records, and managing these records across several tools might cause anyone to miss an essential detail. Unfortunately, most businesses face this challenge, regardless of the industry they are in or how big they are.

With FP&A tools like Datarails, you can unify your accounts and perform tasks associated with reconciling accounts for your enterprise.

How to Reconcile Accounts

While there are tools for account reconciliation that handle a large chunk of the work, you still need someone to compare the records. And you can do this in three steps.

Step 1: Gather All Relevant Records

Get all related records, invoices, and ledgers for each type of account reconciliation you want. For instance, purchases, payments, expenses, and earnings occur every month. Find out where these are recorded and gather them together.

Step 2: Compare the Statements

Start comparing your statements to the external ones and note the records you don’t have. It might be helpful to perform a side-by-side comparison of your records to theirs, so you don’t miss anything. For example, you can analyze each transaction listed in the financial statements to corresponding ones on the bank statement by crossing them out. You can then take note of any transactions that do not appear in the financial report so you can address them later.

To make things simple, begin by focusing on the debits to your accounts. Check if you have every transaction for outgoing funds recorded in your internal ledger. Then do the same for credits. Finally, check that your independent or third-party invoices and statements match the ones in your accounts and note the discrepancies.

Step 3: Review the Discrepancies

If you haven’t already, find those missing records and repeat steps 1 and 2. If you still have discrepancies, it’s time to dig deeper. Review and investigate each transaction with mismatches and speak with the department involved to determine why your records don’t match.

If you’ve done a thorough internal investigation and still can’t account for the errors, it’s time to confirm with the vendors and banks that there are no errors from their end. Unfortunately, banks rarely make errors in their statements because they are electronic records, so you must exhaust all review methods before going this way.

For Better Account Reconciliation, Consolidate Your Data With Datarails

When you have all your data in one place, comparing accounts and spotting errors is easier. An effective reconciliation tool is essential to avoid challenges that come with reconciling accounts manually.

Datarails helps you build data integrity and visibility so that you can see details and descriptions of your financial records for account reconciliation. Request a demo to see how we can help consolidate your data.