Best Practices for Account Reconciliations

Accounting and Accounts Receivable articles

October 3, 2024

This is a blog post from our partner BlackLine, sharing nine best practices for streamlining your account reconciliation process.

Account reconciliation is an accounting process that verifies the accuracy of entries in the business ledger by comparing them to the information in bank statements, business records, vendor invoices, expense receipts, credit card statements, and other data sources.

Nine Account Reconciliation Best Practices

Accountants can follow these nine best practices to ensure the accuracy and integrity of their account reconciliation.

1. Automate:

Expand automation to cover the entire reconciliation process. Like so many aspects of business accounting, account reconciliation benefits greatly from automation. Digital applications reduce time in the process by minimizing or even eliminating manual data entry.

Software can be programmed to operate on rules that improve the integrity and consistency of the information gathered and the analysis process. Digitally enhanced identification of errors and discrepancies significantly improve the accuracy of the reconciliation process. Artificial intelligence (AI) enhances the ability to identify and match appropriate documentation, reducing omissions and cutting down processing time.

2. Evaluate and Improve:

Consider how processes may need to change over time due to factors like employee turnover, new input fields, and M&A activity. As in any other process, how accountants conduct their account reconciliations should be evaluated and improved over time. Internal changes to the company structure and operations, as well as external changes in the market in which the business operates, can have a significant impact on how account reconciliations need to be conducted. Regular adjustments should be made to ensure that the process reflects these changes.

Accountants should review data files, fields of entry, and matching rules and make changes as necessary to ensure that all the data and steps in the reconciliation process reflect the most up-to-date business practices.

3. Standardize the Reconciliation Process:

Use a consistent reconciliation method. To ensure reliability, accountants should endeavor to create and employ a standardized process. Standardization creates consistency in reconciliation. Well-defined parameters and easily understood metrics reduce errors and save time. Standardized methods allow for more insightful information comparisons over time, which helps identify trends and patterns in financial data.

4. Identify and Assess KPIs:

Look at key performance indicators. Using specific metrics to evaluate the account reconciliation performance will ensure the process’s integrity. Accountants should first establish their key performance indicators (KPIs). Metrics such as accuracy, timing, and the number of errors or discrepancies help to measure the effectiveness of the process.

Establishing benchmarks for these and other metrics and regularly evaluating how the process performs against them will identify areas for improvement. The KPIs themselves may also need to be adjusted over time to reflect changes to the business and the process themselves.

5. Regularly Update Account Reconciliation Policies:

How reconciliation is performed largely depends on the policies that the business sets to govern its execution. Policies can govern many aspects of the process, including the timing and frequency of reconciliations, the steps that are followed, who is responsible for various aspects of the reconciliation process, and how errors are identified and reconciled. In the spirit of evaluating and improving, these policies should be regularly monitored and updated to reflect changes to the business and its financial activities.

6. Reconcile in Sections:

Break the process into sections. Reconciliation is a complicated process that will benefit from an incremental approach. It can be broken down into smaller steps to facilitate and make the process more manageable. For example, reconciliation can be broken down into basic elements: identifying relevant accounts, gathering data, setting a timeline, comparing statements, examining individual transactions, identifying discrepancies, and reconciling errors. Tackling each individually and sequentially will make the more extensive process more manageable.

7. Analyze Discrepancies:

Analyze any differences that are found. Once discrepancies are found, this is an opportunity for accountants to do their detective work and determine the cause. A careful review of the ledger information and the source data will help pinpoint the underlying reasons. Discrepancies can be caused by various factors, including manual errors in data entry, improper calculations, timing errors, omitted transactions, delayed payments, and even fraud. Identifying the nature of the discrepancy will determine how it should be addressed and reconciled.

8. Finish On Time:

Review and finish reconciliations on time. Timing is important in the reconciliation process. Unnecessary delays can lead to more errors or discrepancies being overlooked and carried over into another reporting period. Timely completion of reconciliation can help the business close its accounts efficiently and as scheduled, and it can help identify fraud, errors and other trends before they become compounded or cause more problems for the business.

9. Stick to Accounting Rules:

Follow generally accepted accounting principles (GAAP). In the United States, public companies must follow a set of rules, standards, and procedures set by the Financial Accounting Standards Board (FASB). These GAAP are designed to ensure consistency, accuracy, and transparency in financial reporting across various industries.

GAAP requires businesses to use the double-entry bookkeeping system. This system supports GAAP’s goals and is the most common tool for reconciliation because it requires entering a transaction into the general ledger twice. Each entry is recorded as a debit or a credit, and the two always balance out.

Why Is Account Reconciliation Important?

Account reconciliation is an essential business accounting function. It helps businesses address several fundamental objectives in their accounting processes.

All businesses must identify errors and fraud, generate accurate financial statements, file taxes, and comply with myriad laws and regulations at the federal, state, and local levels.

Reconciliation ensures the accuracy and reliability of financial practices and statements to support efficient operations and sound decision-making by management, lenders, and investors.

Author

Revelwood

View all posts