One of the most critical tasks for the accounting or bookkeeping department is reconciling accounting statements. The accounting statements include the balance sheet, the income statement, and the cash flow statement. It is essential that the three accounting statements are reconciled and matched with one another to avoid potential business losses.
If you are unsure what reconciling accounting statements means, reconciling is comparing your company’s financial records with the records in the bank statements. This process is particularly important to identify any potential leakage of finances through scams or unaccounted transactions that may have been made in the financial period.
Businesses must perform this reconciliation regularly to account for fraudulent transactions or financial errors. Most companies opt for monthly reconciliation of their books, while others have quarterly, bi-annual, or annual reconciliation procedures.
Monthly reconciliation is crucial for small businesses as it provides a clearer view of their financial standings.
Methods to Reconcile Accounting Statements
There are two primary methods for reconciling accounting statements. These include:
- Documentation Review: This refers to the comparison of each transaction’s receipts to the bank account statement. Any transaction without a receipt can be identified, and if there are no financial records of such transactions, you might be able to locate the cash leakage. This is why experts emphasize recording petty cash transactions regularly as well.
- Analytics Review: This is more helpful in identifying scams and any errors in the business’s balance sheet. According to this approach, accountants estimate the amount of cash that should ideally be present in the bank account based on the business revenue generation history. It also helps identify business trends and identify areas of weaknesses.
Why is Regular Reconciliation Important?
Business experts emphasize reconciling accounting statements regularly. Here is why it is important for any business to have reconciled accounting statements periodically.
- Error-Free Data Entry: Regular reconciliation of account statements ensures error-free data entry. It allows your accounting team time to record all transactions diligently and maintain all records of invoices and receipts. They can avoid any last-minute hassles, which increases the risk of accounting errors and can cause serious business losses if left unchecked. It also keeps your company audit and financial statements updated in case you need to present them to your investors at the last minute.
- Identify Fraudulent Practices: Regular reconciliation also helps identify any fraudulent practices prevalent in business operations. These could include the issuance of duplicate checks or invoices, unauthorized issuance of invoices, or fraudulent transfers to accounts other than those listed on the business transaction lists.
- Identify Potential Errors: Another key benefit of reconciling your accounting and banking statement is the identification of any potential errors in the statements. Any transaction recorded twice or any transaction which has not been recorded can easily be identified when the statement is compared with the amount reflected in the banking statement. This also keeps your accounting department alert and encourages them to record all transactions in a timely manner.
- Error-Free Tax Filing: Many business owners fail to reconcile their statements on time which can cause a disastrous situation when filing taxes. Unreconciled accounting statements can have serious implications on the tax filing procedure. If your accounting department, however, has a certified accounting professional involved, they will ensure the statements are reconciled on time for tax preparation.
- Avoid Theft: While it is unfortunate, many businesses face the reality that employees secretly steal money from accounts. This can be done by overcharging vendors, stealing petty cash, simply not recording transactions, or having vendors pay into accounts other than the business account. Having reconciled accounting statements eliminates these risks of monetary theft and can identify when or if there has been an unusual transaction from your business account.