How to Reconcile an Account

For any organization, it is important to ensure that all accounting numbers and reports are correct. All monetary transactions, inbound and outbound should add up or legal trouble can ensue. To ensure accounts match, account reconciliation is required.

What Is Account Reconciliation?

Account reconciliation is a process by which recorded transactions are compared to ensure that the account records match up. These transactions can be for one or multiple financial accounts and are compared against monthly statements from a financial institution.

The aim of account reconciliation is to ensure that the balances in the different accounts are identical. This process also helps in organizing the documentation pertaining to the different transactions and accounts and simplifies the efforts for external auditors.

How Do You Reconcile Accounts?

Account reconciliation can be done manually by the bookkeepers of an organization. Alternatively, the accountants may choose to use finance software to reconcile accounts. The latter method is typically preferred due to its convenience and the ease with which the reconciliation can be performed. Even with technological tools available, it is important for accountants and business owners to have an understanding of the process.

To start, the account register must be compared to the bank statement or other financial statements. Each deposit and payment in the register should be checked as soon as it matches the statement. If software is being used for the reconciliation process, the items can be checked easily with a click.

In the next step, the charges, checks and ATM transactions, which have been recorded but not listed on the account statement, must be identified. These items should be deducted from the balance of the statement. Software can help automate this process. Some of the items to keep an eye on include ATM service charges, check printing, overdraft and insufficient funds charges.

Account credits and deposits that are yet to be recorded in the account by the institution must be identified and added to the financial balance. Again, financial software, if being used, will handle this step. In the case of an interest-bearing account, the interest may have to be added if the reconciliation is being done after the statement date.

Using this process, it is unlikely that errors will occur. However, if they do, they need to be adjusted in the balance and added or subtracted as necessary. More importantly, the bank and/or the department must be contacted and notified immediately of any errors.

Once these steps have been completed, the statement balance must now be identical to the balance of the records. If they are mismatched, it becomes imperative to thoroughly investigate and scrutinize all transactions to ascertain the adjustments necessary for balancing the records.

Importance of Reconcile Accounting

Reconciliation of accounts is essential for any organization. It helps prevents overdrafts in the case of cash accounts and in turn, ensures that the organization avoids high fees. There are several more reasons for regular account reconciliation:

Elimination of Accounting Errors: Accountants are human, which means mistakes may occur in spite of their best efforts. Reconciling the accounts on a monthly basis helps in ensuring that the organization’s books are the same as what the financial institution has. Errors, once identified, can be eliminated. Steps can be taken to prevent them from occurring again.

Correction of Business Deposits: Again, human error can cause deposit errors at the financial institution. This can negatively affect the business as well as the reputation of the organization. Such financial errors may also halt or affect regular business operations. Reconciliation ensures that such errors are avoided by correcting the accounts so that the right deposits are made.

Payment of Bills: Several organizations have automated the payments of their expenses and bills. This makes it necessary to monitor all transactions. The balances must be reconciled regularly to prevent missed payments and overdrafts.

Knowing how to reconcile the accounts is essential while running a business. Moreover, account reconciliation should be performed on a monthly basis for best results.

Are you looking to outsource your accounting needs? Get in touch with NuVest Management to find the solution best for you.

BOOK A CONSULTATION