Author: P.J. Yates | Date: 11.22.22 | Read Time: 8-Minutes

If a company’s finances are not managed well, it will run inefficiently. For example, executives would have difficulty knowing whether the company is earning or losing money. They wouldn’t know which suppliers to pay and how much they owe. Without reconciling financial accounts throughout the organization, you’d end up with inaccurate and disorganized records–both of which could potentially harm your business relationships down the line.

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 internal financial records and ledgers with external third-party and independent financial statements. It’s similar to checking your work in Algebra class. Accountants reconcile accounts to ensure that all relevant documents are correct and complete. For example, you can use account reconciliation to verify the accuracy of your balance sheet by comparing it 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 examples such as fake checks or misuse of funds.

Automated account reconciliations help you keep accurate financial records, catch errors, and prevent fraud. You can schedule them to occur as frequently as necessary for your business model and the type of reconciliation is done.

Types of Account Reconciliation
Depending on the context, account reconciliations can refer to personal or professional finances.

The five types of account reconciliation are bank, vendor, business-specific, intercompany, and customer. They’re all used to keep your finances organized.

Bank Reconciliation
Bank reconciliation is the most popular type of account reconciliation. To do this, you compare the transactions in your ledgers to your monthly bank statements. Most transactions are automatically recorded by the bank, though, so reconciling these accounts can help identify discrepancies–such as checks that were issued but not received or missing altogether.

Why is it important to reconcile your bank statement at the end of each month? Because, without fail, the bank will send a summarized statement of that month’s transactions which include the starting balance, all deposits, and withdrawals, as well as any fees charged. By reconciling monthly (or more frequently), allows organizations to quickly find and fix discrepancies.

Vendor Reconciliation
Accounts payable reconciliations compare your records of vendor payments to the statements provided by the vendors themselves. This ensures that you’ve paid vendors for what they actually delivered, rather than relying on your memory or (worse) no documentation at all. reconciling accounts payable is a vital bookkeeping task, but it’s often made more difficult because not all vendors send reports regularly. You may need to request them from time to time in order to reconcile your records accurately.

By comparing the vendor’s statement to your ledger, you can help prevent disagreements between a business and its vendors. This process is called vendor reconciliation, wherein all records show the same transactions. Having accurate records of what was paid strengthens relationships between businesses and their vendors.

Business-specific Reconciliation
You compare your internal records against those of your clients at the beginning and end of a financial cycle to make sure that what you sold or offered matches up. How often this needs to happen varies from business to business – for example, financial organizations are usually required to do this very frequently for accounts with client-owned funds (which is one of the more challenging types of variances).

Intercompany Reconciliation
Intercompany reconciliation processes parent companies use to organize the accounts and ledgers from their various subsidiaries. The goal of an intercompany reconciliation is to identify errors in transactions between two or more subsidiaries – such as billing mistakes with loans, deposits, and payments. Finally, this process clarifies any discrepancies in the company’s financial statement.

Parent companies often use intercompany reconciliation to confirm that there are no errors in invoices or loan records, which then allows for an accurate portrayal of the company’s financial status. Another reason to reconcile between subsidiaries is to pinpoint which assets belong where.

Customer Reconciliation
Customer reconciliation is the process of businesses verifying that the amounts they received match the amount reflected in their accounts receivable ledger records. This system is booming for companies who offer credit terms and options to customers, as accountants can compare what was paid with what remains unpaid.

The customer reconciliation statement is used to identify accounting mistakes or irregularities concerning customers. Customer reconciliations are often done monthly, before a business’ financial statements for the month are released, as part of the account closing process.

Challenges With Account Reconciliation
Depending on the size of your business, you might face several challenges when trying to reconcile accounts throughout your company. A majority of these difficulties center around either a lack of technical expertise or an overwhelming number of records that need to be reconciled.

Slow Processes
Reconciliation is often a time-consuming, tedious process for businesses. This is because they usually have to wait to receive detailed statements from vendors and banks. Also, banks typically use a specific file format which can be different than the one that a business uses. Therefore, users must spend time standardizing files before uploading them into the system. If a company has numerous transactions, this task can quickly exhaust the resources of its financial team since it requires significant man-hours. As result, employees have less time available during their work day-day for other important activities such as financial planning.

Human Errors
Databases can get confusing when a company has too many employees and subsidiaries. If you’re manually transferring data between databases, it’s more likely that mistakes will happen. The process is also more susceptible to errors the more steps there are.

Every data processing task, from downloading and uploading files to checking for consistency and record matching, has a possibility of error. For example, an outdated file could be downloaded or uploaded, or the wrong accounts might be reconciled. Consequently, you might inflate your estimation of cash flow which would lead to more expensive future corrections.

Role Exploitation
A key goal of reconciliation is catching fraud, but if you’re not careful with your oversight, dishonest employees might find ways to cover up evidence of illicit behavior at work. For example, an employee responsible for reconciling vendor records could delete one on purpose.

Too Many Tools
Having a large number of technology tools might work for a small company, however, once the company starts to grow, unforeseen problems will start to occur. For example, if a big company has various records spread out between multiple tools, it becomes very easy to overlook an important detail. It’s an issue that nearly all businesses face at some point regardless of their size or industry.

RynohLive tool that allows you to unify your accounts and perform account reconciliation tasks for your enterprise.

How to Reconcile Accounts
While technology might do the heavy lifting when it comes to account reconciliation, you’ll still need a human touch to compare records. This process can be broken down into three steps.

Step 1: Gather All Relevant Records
Gather all relevant records, invoices, and ledgers for each type of account reconciliation you desire. For example, purchases, payments, expenses, and earnings take place monthly. Discover where these are documented and assemble them together.

Step 2: Compare the Statements
Compare your internal records to the external financial statements. If helpful, do a side-by-side comparison so nothing is missed. For example, match each transaction on the bank statement to the corresponding ones in the report and cross them off as you go. Any transactions that don’t appear in the financial report need investigating.

To make things easy, start by looking at the debits in your accounts. Ensure that every outgoing fund’s transaction is recorded in your internal ledger. Next, do the same for credits. Finally, compare the independent or third-party invoices and statements to the ones in your accounts, making note of any differences you see.

Step 3: Review the Discrepancies
If you find any discrepancies, review and investigate each transaction with mismatches, then speak to the department involved to determine why your records don’t match.

After you’ve investigated the errors internally and still can’t find an explanation, it’s time to check with your vendors and banks to see if the error is on their end. Even though banks rarely make mistakes with electronic records, you should confirm this possibility before moving forward.

For Better Account Reconciliation, Consolidate Your Data With RynohLive
By having all your data sorted and available in one space, you can compare accounts with ease and quickly catch any errors. A good reconciliation tool is key to avoid common struggles that come with reconciling accounts by hand.

Rynoh can help organize your data and make it more visible so you can reconcile accounts with ease. Request a demo to see how we could simplify things for you by consolidating all of your information.