Last day of the fiscal year, and you are closing the books. One of the employees writes a check for 50000 AED to a vendor. The internal records show a payment of 50000 AED, but your balance will not match your bank statement due to the time difference in check clearing. 

Account reconciliation addresses these differences and mismatches of records. It helps you identify any gaps in your accounting statement to make adjustments and ensure accuracy. 

In this post, we will discuss account reconciliation and how you can ensure compliance with proper reporting.

What is Account Reconciliation?

Account reconciliation involves comparing your internal financial statements to external and third-party sources, such as bank statements, to ensure the accuracy of financial records.  

The frequency of account reconciliation will depend upon your company's internal policies and industry practices. Generally, companies conduct account reconciliations every month or quarter. 

You can also automate this process and reconcile accounts in real time. The software integrates with your accounting systems and ERPs and facilitates record-keeping. Employees directly upload receipts on the software, and all the transactions are visible on a centralized platform for real-time tracking. Then, the tool automatically categorizes the expenses into different general ledger (GL) accounts and tax codes, making reconciliation simple. 

Why Invest in Account Reconciliation?

Account reconciliation is a standard accounting process. While it seems reasonable to continue using traditional manual systems for record-keeping and reconciling, having a unified accounting platform enables you to close books 10X faster. 

Imagine a single tool to manage reimbursement, petty cash, corporate cards, and end-to-end procurement. You eliminate the chances of errors and fraud with more visibility over your money. As a result, you get accurate financial statements, creating a transparent environment for stakeholders. 

How is Account Reconciliation Done?

Account reconciliation involves comparing GL account balances to supporting external sources and records. Here is a complete breakdown of the process: 

1. Identify Accounts for Reconciliation

Identify the accounts that need reconciliation. This depends on the nature of the business, industry regulations, and the company's internal processes. Common accounts include:

• Bank accounts
• Accounts payables and receivables
• VAT
• Inventory
• Intercompany transactions
• Revenue
• Expenses

2. Gather Relevant Documents

Collect supporting documents for the identified accounts, such as bank statements, invoices, receipts, and other relevant financial records.

3. Verify Opening Balances

Compare the opening balances in the company's records with the corresponding balances in external statements or supporting documentation. This ensures that the starting point for reconciliation is accurate.

4. Adjust Differences

Identify discrepancies and make adjustments as needed. Based on the types of accounts chosen, you are likely to have the following discrepancies:

1. Bank: Outstanding checks, deposits in transit, or bank fees
2. Accounts payable and receivable: For accounts payable, mismatch between the company's records and vendor invoices. On the accounts receivable side, payments not being accurately reflected in the company's records.
3. Value Added Tax (VAT): Errors in calculating input and output VAT, misclassification of transactions, or discrepancies between recorded and actual tax amounts
4. Inventory: Errors in recording stock levels, theft, obsolescence, or misclassification of inventory items
5. Intercompany: Errors in eliminating intercompany transactions, misallocating expenses, or differences in intercompany balances
6. Revenue: Unrecorded sales, errors in invoicing, or misapplication of revenue recognition principles
7. Expenses: Unrecorded expenses, duplicate payments, or errors in expense categorization

5. Review and Finalize

Review the reconciled accounts for accuracy and completeness. Obtain necessary approvals from management or relevant stakeholders before making adjustments and finalizing financial decisions.

Finalize the reconciliation process and document the adjustments made. Retain all relevant records for auditing purposes and future reference.

Top 5 Account Reconciliation Errors

Here are the top 5 most common errors that lead to discrepancies in account reconciliation: 

1. Omission

Omission includes missing certain transactions from the accounting records due to oversight. For instance, forgetting to record a payment received results in understating cash and accounts receivable.

Solution: Review transaction documentation, bank statements, and other supporting records to identify and record any omitted transactions.

2. Duplication

Duplication involves recording the same transaction more than once, leading to an overstatement of figures. For instance, recording a sales invoice twice causes excessive revenue figures.

Solution: Review transactions and eliminate any duplicate entries.

3. Timing Difference

Timing differences refer to situations where a transaction is recorded in the books at a different time than when it clears the bank or is recognized for accounting purposes. For instance, writing a check at the end of the month that doesn't clear the bank until the beginning of the following month.

Solution: Regularly compare bank statements with the company's records, adjusting for timing differences.

4. Fraud

Fraudulent activities involve intentionally manipulating financial records to deceive stakeholders and make personal gains. For instance, employees falsify expense receipts to inflate reimbursement claims.

Solution: Implement strong internal controls, conduct regular audits, and promote a culture of ethical behavior.

5. Misclassification

Misclassification occurs when transactions are recorded in the wrong accounts. For instance, adding a purchase of office supplies to the wrong expense account or labeling an incorrect GL code.

Solution: Review transactions to ensure proper coding and provide training to prevent misclassification errors.

Risk of Overlooking Account Reconciliation 

While account reconciliation seems a redundant task of matching accounts’ balances, small defaults can lead to operational, financial, and legal challenges.

You can face hefty fines or penalties imposed by regulatory authorities. You may also encounter disruptions due to legal investigations, audits, or even suspension of business activities. Moreover, failure to adhere to regulations can harm a company's reputation. 

In some cases, it leads to the revocation of licenses or permits, jeopardizing the company's ability to operate within the UAE. 

Here are some challenges you face when you do not pay due attention to account reconciliation: 

1. Manual Errors

The chances of errors are high if you rely on manual processes for account reconciliation. It can distort financial records, impacting decision-making and financial analysis.

Example: An employee records a sales transaction twice, leading to an inaccurate representation of the company's revenue.

2. Fraud

Detecting fraud becomes difficult when you lack real-time visibility or the accounts are not being cross-verified. As a result, fraudulent activities go undetected, causing financial losses and damaging trust.

Example: An employee manipulates expense reports to divert company funds for personal use.

3. Overdrafts

You lose sight of the funds available, leading to bounced checks or potential bank charges. This harms the company's financial stability and relationships with vendors.

Example: The employee wrote a check with insufficient funds, resulting in a bounced check and delayed vendor payment.

4. Inaccurate Reporting

You increase the chances of discrepancies in financial reports, providing stakeholders with misleading information. This undermines the confidence in the company's financial health and performance.

Example: An employee overlooking the balance between revenue and expenses leads to inaccurate profitability figures in financial statements.

5. Tax Issues

You can encounter inaccurate tax calculations or omissions, leading to tax filing errors. This leads to penalties, fines, and increased scrutiny from tax authorities.

Example: An employee's oversight of business expenses, like travel and meals, results in underreported deductions, leading to tax filing inaccuracies.

6. Affect Credit Score

You increase the chances of missed payments or errors that negatively impact the company's credit score. This further affects the ability to secure loans or favorable credit terms.

Example: An employee's oversight in paying a critical supplier invoice on time leads to late fees, strains supplier relations, and affects the company's credit score.

7. Audit Challenges

With incomplete or inaccurate reconciliations, you risk challenges during audits, demanding additional time and resources. This results in increased audit costs and potential legal implications.

Example: An employee fails to reconcile monthly bank statements, leading to missing documentation. The subsequent need for extensive audit adjustments increases audit costs and poses legal risks.

Automate For Ease 

Managing 1000s of expenses and individually categorizing and coding them is a big headache for finance teams. Leaving this to your accounting software will further require oversight during audit season, adding to the workload. Moreover, these software don’t help with record-keeping or real-time visibility, causing you to spend more on account reconciliation. 

Pluto makes this easier by bringing it all to a centralized platform. By shifting to the Pluto ecosystem, you close books 10x faster and simplify spend management. It is as simple as integrating your accounting software and ERPs and getting visibility over your money from Day one. 

Streamline your financial management with our all-in-one platform, integrating accounts payable software for comprehensive control. Manage categorization, reimbursements, corporate cards, and all aspects of accounts payable seamlessly from a unified dashboard.

The best part is that you can bulk export and import logs and even lock the transactions to avoid changes once approved. Further, with view-only access to external bookkeepers, you ensure transparency and security with no chaos during audit season. 

Reconciliation in Accounting Made Simple

Meeting compliance standards should not be an afterthought during the audit season. 

You must adopt the right processes, standards, and tools to get complete control over your accounts. This will ensure accurate records and build trust amongst stakeholders. Moreover, the teams will have a proper systems to reconcile without rushing at the end time. 

With automation, you make the process easier and more efficient. Pluto assists you with a centralized platform to automate your accounts payables and simplify account reconciliation without having to juggle multiple accounting software