What is Financial Reconciliation?

Financial reconciliation involves comparing two different data sets to verify the integrity and accuracy of the data contained therein. Financial reconciliation helps ensure a company’s financial records are accurate and reliable so that company leaders can make informed decisions going forward. Financial reconciliation is typically performed on a regularly scheduled basis and is applied to a variety of sources of financial information.

How it Works

Financial reconciliation compares internally and externally generated data sets to verify that both are accurate and up to date. External data sets may originate with banks or vendors and include invoices, receipts, and monthly bank statements.

The Importance of Financial Reconciliation

Financial reconciliation helps your company address several aspects of its accounting process.

• Identifying accounting errors: An essential activity for any company, financial reconciliation enables a company to pinpoint errors, omissions, duplicate information, and more.
• Identifying fraud: No business is completely safe from the possibility someone may attempt to embezzle funds or otherwise engage in fraudulent activity. Financial reconciliation is one of the most effective ways to identify potential instances of fraud.
• Ensuring the integrity of financial statements: Financial statements help guide company decision-makers as well as provide current and potential investors with an accurate picture of the company’s financial state. But financial statements are built on transactional information. Reconciliation ensures all transactions are properly verified before they are used to help create financial statements.
• Ensuring compliance: Companies use financial reconciliation to ensure tax compliance as well as compliance with relevant accounting standards.

The Different Types of Financial Reconciliation

Most businesses perform one of two types of financial reconciliation: either reviewing business documents or comparing current and historical data. Documents reviewed in the first type of reconciliation may include receipts, invoices, or bank statements; in the second type of reconciliation, current figures are compared with historical data. If the current figures wind up significantly different than projections made using the historical data, it may suggest irregularities.

Different companies may choose different methods of financial reconciliation, including:

• Bank reconciliation: One of the most popular forms of reconciliation, this involves comparing internal data to data in the monthly bank statement
• Vendor reconciliation: Comparing the accounts payable ledger with statements provided by vendors and suppliers
• Intercompany reconciliation: Comparing statements and reviewing transactions between various units or subsidiaries of a parent company
• Business-specific reconciliation: Reconciling the accounts of a specific aspect of a company, such as inventory or expenses
• Credit card reconciliation: Ensuring that receipts from company credit cards match statements provided by the credit card company
• Petty cash reconciliation: All petty cash transactions are reconciled

The Process of Reconciling Financial Statements

Financial reconciliation involves a number of well-established steps and processes.

The initial phase of the reconciliation process involves gathering and organizing all relevant documents. After the appropriate time period and the account(s) to be reconciled have been determined, the general ledger isa good place to start, as it will typically provide the most information on debits and credits.

Once all of the relevant documents have been prepared and the appropriate in-house data source determined, the accounting team will conduct a forensic comparison. This involves reviewing all debits and credits, making adjustments when it is right and necessary to do so, and verifying the opening and closing balances for the period in question.

The final stage of the reconciliation process involves making sure all balances are aligned and that any adjustments are accurate and appropriate. Following that, an accounting manager or financial controller will conduct their own review and sign off on the results.

Financial reconciliation is key to ensuring the integrity of a company’s financial statements and is a proven way to identify fraudulent activity. Accurate and timely financial reconciliation also enables a company to remain compliant with their tax and accounting obligations.

The Growing Role of Automation in the Reconciliation Process

Trintech’s reconciliation software can greatly simplify the entire financial reconciliation process by automating many of the more mundane tasks. This reduction in low value tasks provides your team the ability to contribute to larger organizational insights and reduces the risk of potential burnout, while revealing discrepancies or potential issues as they arise.

To learn more about how automation software can help revolutionize your financial reconciliation processes, visit our webpage.