By prioritizing reconciliation in accounting, lawyers and law firms can maintain financial accuracy and compliance, but that doesn’t mean that lawyers need to spend hours each day looking at accounts on paper or in Excel. By leveraging technology for more efficient reconciliation processes, lawyers can save time and greatly reduce the chance of error. The goal of bank reconciliation is to check that ending balances match on both your bank statement and your records. Should there be any discrepancies that come up through the reconciliation process, you can then take action to resolve them. The primary objective of reconciliation is to identify and resolve any discrepancies between the two sets of records.
Why Is Account Reconciliation Important?
Single-entry bookkeeping is less complicated than double-entry and may be adequate for smaller businesses. Companies with single-entry bookkeeping systems can perform a form of reconciliation by comparing invoices, receipts, and other documentation against the entries in their books. If the indirect method is used, the cash flow from the operations section is already presented as a reconciliation of the three financial statements. Other reconciliations turn non-GAAP measures, such as earnings before interest, taxes, depreciation, and amortization (EBITDA), into their GAAP-approved counterparts. The account conversion method is where business records such as receipts or canceled checks are simply compared with the entries in the general ledger. A business that processes a few transactions a month may be able to reconcile its accounts monthly, while a larger business with hundreds of transactions daily may need to reconcile its accounts more frequently.
Today, most accounting software applications will perform much of the bank reconciliation process for you, but it’s still important to regularly review your statements for errors and discrepancies that may appear. Balance sheet reconciliation involves comparing the balances of internal accounts against corresponding external documents. It’s a bit like our earlier example with the bank statement, but this process is broader. For small businesses, the main goal of reconciling your bank statement is to ensure that the recorded balance of your business and the recorded balance of the bank match up.
Streamlining the reconciliation process
Balance sheet account reconciliation can cover everything from cash and investments to liabilities and shareholders’ equity (any accounts found on the balance sheet). Two of the most common types of account reconciliation include balance sheet reconciliation and general ledger reconciliation. At the end of the month, the credit card statement arrives and should reflect the same transactions and ending balance as in the general ledger. Businesses often use credit cards for expenses, and these transactions are recorded in the internal ledgers. For example, real estate investment company ABC installment sales accounting method purchases approximately five buildings per fiscal year based on previous activity levels. This year, the estimated amount of the expected account balance is off by a significant amount.
- Larger businesses with several branches may also need to complete intercompany reconciliations.
- This not only keeps operations running smoothly but also helps avoid unnecessary financial strain or surprises.
- HighRadius’ comprehensive AI-powered Record to Report suite allows you to streamline and improve your business’s account reconciliationprocesses.
- The important thing is to establish internal processes for account reconciliation and adhere to those processes.
Best Practices for Maintaining Accounting Accuracy
As a result, the accounting industry has sought ways to automate a previously strenuous manual process. The pressure of SOX is coupled with the perennial need to mitigate erroneous reconciliation in the process. Reconciling law firm trust bank accounts regularly via three-way reconciliation allows you to uphold your duty to keep proper, accurate accounting records for client funds held in trust, while also ensuring you stay compliant. By adhering to these best practices, businesses can ensure their account reconciliation process is as efficient, accurate, and effective as possible, contributing to better financial management and decision-making. But, if there are discrepancies due to pending charges or interest fees, reconciling accounts helps identify and correct the amounts owing, ensuring the company’s records match the external document.
First, there are some obvious reasons why there might be discrepancies in your account. If you’ve written a check to a vendor and reduced your account balance in your internal systems accordingly, your bank might show a higher balance until the check hits your account. Similarly, if you were expecting an electronic payment in one month, but it didn’t actually clear until a day before or after the end of the month, this could cause a discrepancy. Accounting software is one of a number of tools that organizations use to carry out this process thus eliminating errors and therefore making accurate decisions based on the financial information.
For example, when performing bank reconciliation, a business compares its financial statements with the records received from the bank. This helps identify timing delays in deposits, payments, fees, and interest that may have been recorded by one entity but not the other. Account reconciliation is typically carried out at the end of an accounting period, such as monthly close, to ensure that all transactions have been accurately recorded and the closing statements are correct. Vendor reconciliations involve comparing the statements provided by vendors or suppliers with the business’s accounts payable ledger.