Account reconciliation: Why It's Important and How to Get Your Numbers Right

What is account reconciliation?

The process of reconciling accounts is a key part of financial bookkeeping. Account reconciliation is the process of comparing two sets of numbers to ensure that they are accurate and that there are no errors. This can be done for individual accounts or for entire organizations, including profit and loss statements, balance sheets and other financial reports. It's a way to make sure that all the money coming in and going out of your business is accounted for.

An account reconciliation is a critical step in making sure you have complete and accurate records of all your financial transactions.

Why is account reconciliation important?

As a business owner, you need to know the status of your business bank account before you write a new cheque or make a credit card payment. By regularly analysing your account balance, you will know how much money you can afford to invest or hold without damaging your cash flow.

1/ To reconcile your accounts with your bank account

Bank reconciliations help you ensure that your books are in sync with your bank accounts. If there's a discrepancy between what your records say and what your bank says, it could be an error or it could be a problem in how you're recording transactions. If you don't catch these errors now, they'll only compound as time goes on, making them more difficult to find and fix later on.

2/To monitor payment status

They also help ensure that payments have been processed and recorded properly by the bank. Without reconciling your accounts, you may not know if someone has transferred funds into or out of your account without authorization, or if there was a mistake made when processing a payment through your account (like when someone accidentally sends too much money).

3/To prevent errors and fraud

When you don't reconcile your numbers on a regular basis and make sure everything matches up correctly, you're more likely to make mistakes with your finances — and these mistakes could cost you money down the road.

How do I reconcile my accounts?

You'll need to gather all of your bank statements and check them against each other to see if there are any discrepancies between them. You'll also need to make sure that all deposits were made into the correct account, and that no checks were written out of order or missing from the stack of checks provided by your bank.

Any operations that have not been marked should alert you. Pay particular attention if you notice :

• A transaction not recorded in the "Bank" account;
• An entry that should not have been recorded in the accounts;
• Errors in the amounts or positioning of the transaction (debit or credit).

When checking past transactions on your bank account, keep in mind that they do not include current transactions.

Deduct from your current balance any outstanding transactions that will be added to the debit, and add any amounts that will be added to the credit:

• Future direct debits,
• Standing orders you have set up,
• Future transfers in your favour.

What causes discrepancies in your account statement?

Accounting errors can be costly, but they're often preventable. Here's what you need to know about account reconciliation and how to prevent errors from happening. There are several reasons accounts receivable might not match up with your records:

• Accounts receivable: You invoice customers for products or services sold, but they don't always pay right away. A customer may dispute the charges or ask for an extension on payment terms. In these cases, it's up to you as a business owner to resolve any issues with the client before they become a problem on your end.
• Incorrect invoice amount: If you accidentally typed in an incorrect amount for the invoice, there will be a discrepancy between what the client owes and what was recorded in your system. This is why it's important to double-check invoices before sending them out!
• Late payments: If your invoice went out promptly but hasn't been paid yet, this will show up as an account receivable balance until the transaction is complete.

From which date should you reconcile your accounts?

The accounting entries in your business account must be checked at least once a month, as soon as you receive your account statement from your bank.

Reconciliation preparation points

You can do it yourself, or delegate it to your accounting department (if you have one). You can also delegate the bookkeeping of your account to your accountant to avoid typing errors as much as possible.

If the account statement you have downloaded is compatible with your accounting software, you will be able to easily check your business account and obtain the updated balance in an instant. This is especially important if you run a large company with many accounting operations.

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