If you are a small business owner seeking guidance on how to perform account reconciliations, you’ve come to the right place! I will walk you through it. I will also discuss different types of reconciliations, why you should reconcile your accounts, and when reconciliations are completed.  

In the world of Accounting, Accountants and Small Business Owners perform reconciliations to ensure their accounts are balanced correctly. The reconciliation process requires comparing two sets of data – data that has been created internally and data from a third-party – to confirm that they match up to the exact value on a specific date. Performing account reconciliations will not only provide you satisfaction that your accounts are accurate, but it will also allow you to record your cash position and forecast your cash flow with accurate figures.  

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There are four different types of reconciliations:

Bank Reconciliation

The most common type of reconciliation is the Bank Reconciliation. This monthly reconciliation process requires comparing the value of recorded bank transactions in your accounting software to your monthly bank statements.  

Vendor Reconciliation

Vendor Reconciliation is when you compare the balance owed on supplier statements to transactions in your payable ledger and overall balance. Suppliers may not automatically provide you their statements, so it is best to request them on a periodic basis.  

Customer Reconciliation

Businesses that offer credit terms to their customers perform Customer Reconciliations. This process compares details of the Accounts Receivable Ledger to the Receivables Control Account in the general ledger.  

The Accounts Receivable Ledger records invoices and payments by each customer whereas the Receivables Control Account provides only a summary of all receivable transactions.  

Business Specific Reconciliation

Business Specific Reconciliations vary based on the specifics of your personal businesses, i.e., Inventory Reconciliation. Businesses that sell goods will need to do a stock-take to ensure that the value of inventory on the balance sheet matches the value of goods held in inventory. To perform this reconciliation, an individual would have to physically count the number of goods held in inventory.  

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You must be wondering, what is the purpose of reconciling all these accounts? Well, you should reconcile your accounts for three reasons:  

In case you get audited! All businesses are required to file annual statements with accurate figures. When your business is selected for an audit, all financial statements will get reviewed for accuracy and they must all be free from any misstatements. Balance Sheet Reconciliations are among the many tasks that get performed during an annual audit. So, save yourself by performing your account reconciliations on a periodic basis!

Reconciling Vendor accounts can help ensure that you are paying vendors on a timely basis and your day-to-day operations are maintained. Missing payments or not paying on time can lead you to build a poor relationship with your suppliers. This can result in a loss of service or goods from suppliers ultimately affecting demand due to customer requirements not being met.

Reconciling your bank on a periodic basis can help minimize the chances of receiving fines and penalties. Financial Institutions are less likely to waive fees for missed payments or approved overdraft values being exceeded.

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The nature or type of your business will determine how often you should perform account reconciliations.  

Small Businesses that produce monthly management accounts should reconcile their bank, receivables (customer reconciliations), and payables (supplier reconciliations) at least once every month to maintain accuracy. If you are a small business owner whose business operates in a non-complex manner, you should still regularly reconcile your accounts once every month for best practice. Any differences or issues that arise will be much easier to comprehend when taken place over a shorter time-period.  

On the other hand, high-growth businesses that tend to burn a lot of cash or have little cash in the bank should perform bank reconciliations on a weekly basis. If you are constantly short on cash, you might even want to consider reconciling your bank daily.  

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Here are the four steps on how to reconcile accounts:

Verify that the Opening Balances on both sets of data match  

Open the bank ledger account on your accounting software (internal) and compare it to the bank statement (external) for the same period. Verify that the opening balance on the former matches to the closing balance on the latter.

Record the difference in the Closing Balances  

Write down the closing balance (i.e., month- end) from the external document (i.e., bank statement) and compare the figure to the closing balance of the corresponding account in your accounting software. The difference refers to the value that is needed to fully reconcile the account.

Place a check-mark next to all the new activity from the external document

Record any new transactions on the external document into your internal database, i.e., payments, issue of new invoices, bank charges, interest received.

Review Closing Balance and if needed, run a reconciliation report

The Closing Balance on the account being reconciled will match to the Closing Balance on the external document once all missing or duplicate transactions have been posted or removed.  

HTH & Accounting Associates help organizations and business owners with accounting and/or financial consulting services.

For Help with accounting or Bookkeeping contact us at accounting@thaddeus.org or call us at 909-599-2111.

Thanks for reading

Gurpeet

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