In business, your financial statements function like test results at the doctor’s office. They tell you what’s going on inside and if you need to take corrective action.
But what if those test results aren’t a true reflection of your health? What if your financial statements aren’t showing you a true picture of your business? This can happen if you skip the account reconciliation process.
Let’s take a look at the reconciliation process, why it matters, and what can go wrong if you decide to skip reconciling the accounts.
What is account reconciliation?
Account reconciliation is the process of verifying the beginning and ending balance of an account against an outside source. An easy example of this is reconciling a bank account in your accounting system against the statement provided by the bank.
Reconciliation confirms that the balances are correct and that your accounting system is representative of your actual financial state. Reconciling serves as a quality control to ensure that your books don’t contain errors.
For example, if your ending balances don’t match, you’ll check the transactions to see what’s missing. You may find that a $2300 transaction was accidentally entered as $3200, throwing your books off by $900. Without reconciliation, it’s likely this wouldn’t be caught until much later, leaving you with inaccurate balances the entire time.
In addition to errors, there are a number of items that can slip by if you don’t reconcile, including:
- Bank fees
- Automatic deposits
- Automatic withdrawals
All these transactions can occur without your knowledge and may never be entered into the system. Paper checks can also cause problems if they are entered in one month but don’t clear the bank until the following month, putting them in a different accounting period.
If any discrepancies are found during your reconciliation, you’ll need to correct them. This is done using journal entries.
By reconciling your accounts each and every month, you’ll be confident that your balances are correct, every transaction is accounted for, and the numbers you’re working with are a true reflection of reality.
What happens if you don’t reconcile?
So, what happens if we choose to skip the reconciliation process? After all, reconciling can be a chore and take longer than you’d like, especially if you have a large number of accounts to deal with.
Let’s think about where reconciliation falls in the accounting process. On a day-to-day basis, we have transactional accounting. This is the process of recording transactions as they occur. A bill is paid and entered. Income is received and entered as well.
At the end of the month, we produce financial statements to show us the big picture of what all those transactions have created. But how do we know those statements are accurate?
The reconciliation process exists to make sure every transaction that goes into the financial statements is correct. It weeds out mistakes and uncovers omissions so they can be fixed before statements are generated. When you skip reconciliations, those mistakes are added up and carried over to the financial statements, leaving you with misleading information and an incomplete picture of your business.
Of course, in the rush of business and handling all the other accounting and finance tasks, it’s still tempting to skip reconciliations and jump right to financial reporting. Fortunately, there are a few things you can do to make the process easier so you don’t have to cut corners.
How can you make reconciliation easier?
Technology offers a lot of help when it comes to reconciliations. There are several accounting tools and apps that help you automate your reconciliations, helping you locate discrepancies in no time. This makes it much easier for you to reconcile every account, every month.
If you’re not using automation, make sure you’re using an efficient system to handle your reconciliations. You should be following the same process each and every month to be as efficient as possible. Technology can help again, by gathering bank statements automatically so you’re not running around looking for documents at the last minute.
As much as we hate to admit it, there are times when you just won’t reconcile every single account. If you have a large number of accounts, it may just take too much time to complete before the close each month. One solution to this is getting an early start. In some cases, you’ll have access to statements long before the monthly close, so you can go ahead and reconcile those accounts early. It all depends on the statement dates on each account.
In the event that you cannot reconcile every account, you need to consider triage. Which accounts are in the most desperate need of reconciliation and which are the safest to skip?
The highest priority accounts to reconcile are asset and liability accounts like:
- Accounts payable/receivable
- And inventory
These accounts change frequently, are vulnerable to errors, and can have a huge impact on your day-to-day decision making if they are inaccurate. Focus on them first, but work toward a workflow and system that allows you to reconcile every account regularly. When you know all your numbers are accurate, you’ll be in a much better place to make effective financial decisions.