What Is Account Reconciliation?

Keeping accurate financial statements is vital for every business since even small errors can create big problems, especially if they’re not caught right away.

Up-to-date financial data not only allows you to make well-informed decisions for the future of your company, but it also helps you save time during tax season and gain the trust of potential investors. 

However, error-free statements don’t happen by accident. They’re the result of account reconciliation, a process where two sets of financial records are compared to ensure they match. 

Account reconciliation typically involves comparing your company’s own financial records to external statements like invoices, bills or bank statements.

By reconciling your accounts regularly, you’ll be able to confirm that all your records are complete and error-free, keeping your business running smoothly and your finances accurate.

Let’s learn more about account reconciliation and why it’s an important task for every company.

Why Is Account Reconciliation Important?

Even with streamlined, automated software like QuickBooks helping you manage all of your accounts, there is still room for mistakes to happen: bank processing errors, an accidental extra zero added to an invoice or a double payment made to a vendor. 

Reconciling your accounts helps identify discrepancies, both big and small, making it a crucial task to complete each month.

It Helps You Catch Errors

Mistakes happen to everyone. Catching and fixing them as early as possible is key to avoiding bigger problems later on, saving you or your bookkeeper from future headaches and wasted time.

It Prevents Fraud

Fraud is unfortunately becoming more prevalent. In 2024, 38% of people in the United States reported losing money to fraud, totaling a loss of $12.5 billion.

Fraud can happen internally or externally, affecting your profitability and people’s trust in you as a company. Regular reconciliation allows you to catch fraudulent activity and helps prevent it from happening again in the future.

It Ensures Accurate Financial Statements

So many of your decisions as a business owner need to be backed by solid data. If your income statements and balance sheets are inaccurate, tasks like forecasting, applying for loans and speaking to potential investors will become more challenging. 

It Prepares You for Tax Season

Tax season can be stressful if you’re not well-prepared. But it doesn’t have to be a headache. When you regularly reconcile your accounts, you and your accountant will have less work on your hands when the next tax season rolls around.

It Helps You Stay on Top of Your Finances

Many businesses struggle with cash flow, but knowing how much money you have to work with at a given time is vital for good decision-making. 

Reconciliation allows you to know for sure how much you’ve got coming in and going out of your business every month. You can then use these figures to make well-informed decisions about how best to grow your company.

What Types of Account Reconciliation Are There?

Depending on the structure of your business and how you conduct sales, you may need to perform several different types of account reconciliation each month, including:

• Bank reconciliation: The most common type of reconciliation for most businesses, this compares your company’s records with your bank statements.
• Customer reconciliation: This verifies whether your accounts receivable are correct; that is, whether the money owed to you by customers matches up with what’s in your ledger.
• Vendor reconciliation: This verifies whether your accounts payable are correct; that is, whether the money you paid for products or services matches up with what the vendor received.
• Credit card reconciliation: This verifies whether your credit statements match up with your expense records, ensuring that every purchase is accounted for and that there are no fraudulent charges.
• Intercompany reconciliation: Typically only used by larger companies, intercompany reconciliation verifies that all transactions match between all the different divisions of your business.

How Often Should a Business Reconcile Accounts?

The frequency with which you should reconcile your accounts depends on a few factors, including:

• The volume of transactions you handle
• The complexity of your operations
• The need for up-to-date, accurate financial data

Most small businesses find that monthly reconciliation works well, especially for bank statements and credit card statements that are paid monthly.

Businesses that process a high volume of daily transactions may find weekly or even daily reconciliation more effective in preventing operational backlogs.

How Do I Reconcile My Accounts?

Even if you use accounting software to reconcile your accounts, or you outsource the work to a bookkeeping service, it’s still worth knowing how to compare your own records.

• Gather all records: Collect all your records for the month (or your chosen period of time). This can include bank statements, receipts, payments, invoices and other earnings.
• Compare statements: Next, compare your internal statements with external statements. Make note of any transactions or statements that are missing or different.
• Review discrepancies: Now that you’ve caught any errors, it’s time to investigate. Locate any missing statements that you can. If things still aren’t adding up, speak with employees, vendors and banks to see if they can identify the source of the error.

This process is fairly straightforward. However, it can be tedious and time-consuming, especially for businesses with a high transaction volume. Comparing statements line by line takes valuable time away from completing other important tasks that come with running a growing business.

Final Thoughts

Many business owners recognize the importance of account reconciliation, but it can still come with challenges.

Without the right tools and knowledge, keeping your finances straight is very prone to human error. For instance, if you’re a startup currently relying on Excel spreadsheets, a simple mistake in a formula can throw off your data completely.

Even automated systems like QuickBooks are not a complete fix-all for errors. Accidentally omitting a receipt can throw off your cash flow numbers, giving you an inaccurate picture of your true financial situation.

That’s where Finvisor can help. Our full suite of accounting, bookkeeping and reporting services can help simplify your company’s account reconciliation each month, giving you more time to work on your business. 

Our experts will give you the peace of mind you deserve, knowing that your accounts are accurate each month.

Reach out to Finvisor today to learn more about what it’s like to work with us.