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4 Reasons Your Accounts Won’t Reconcile
When it’s time to close out the books for the month and prep your financial statements, reconciliations are a big part of the process. Really, “a big part” is a massive understatement. Account reconciliations ensure that every transaction has been recorded free of errors. Without it, any errors in your books would carry over onto your financial statements and end-of-month reports.
What is account reconciliation? Simply put, it’s the process of comparing your accounting records to an outside source — like a bank statement — to make sure everything is accounted for. You need to reconcile as many accounts as possible each month, with a priority on those accounts that are most critical or have the highest risk of errors. Often, it’s as simple as entering opening and closing balances and celebrating that everything is already good to go.
Then, of course, there are times when the account doesn’t reconcile and you need to find out why. At that point, it’s your job to track down the discrepancy and correct it. There are a number of issues that can prevent a reconciliation from matching up. Here are four major reasons for reconciliation discrepancies:
One of the biggest causes of reconciliation discrepancies is timing. Any time a transaction is recorded in one period and clears the bank in another, it’s going to cause the reconciliation to be off. For instance, if a check is issued on January 30th but doesn’t clear the bank until February 2nd, that amount will show up in your books for January but not on your January bank statement.
Timing issues are common, especially near the beginning or end of the month. With the increase in electronic banking and fewer paper checks, however, this happens less frequently than it used to. If you do have a timing difference, you may need to make a journal entry to bring the books into alignment, with an explanation of why the entry was needed.
Timing differences are fairly harmless since the transactions are entered, just not in the same period. The other three common reasons for a reconciliation discrepancy can leave you with serious issues if you don’t catch them.
Errors are a common source of discrepancies. These can take the form of miskeyed dollar amounts, missing decimal points, or transposed numbers. For instance, you may have a transaction for $250 on the bank statement but your bookkeeper accidentally entered it for $520. This is becoming less and less common as more of the accounting process is automated, but it does still occur when manual data entry is needed.
It’s also possible that a transaction could be entered into the wrong account. When this happens, you should see a discrepancy in both reconciliations and you’ll need to correct the error to make both accounts reconcile.
At times, transactions aren’t just wrong, they’re missing completely (or duplicated). If a transaction is forgotten or entered twice, the reconciliation will be off by the amount of the transactions, making it a bit easier to locate.
Although automated accounting software has made this less of a problem, there are occasions where an automated bank feed will drop or duplicate a transaction. It’s also possible to accidentally delete a transaction that’s already been entered. With your transactions making such a treacherous journey, it’s no wonder we need reconciliations to ensure they make it home safely.
In addition to missed transactions, there are also transactions that simply weren’t entered because you didn’t know about them. One example of this is bank fees or interest credited to a bank account. These will show up on your bank statement but may never have been entered into your accounting system because you were unaware of them at the time. These can be added at the time of the reconciliation.
The last thing you want to find out is that someone with access to your finances is committing fraud. But, of course, if they are you definitely do want to find out. Fraudulent transactions will often be left unrecorded - for obvious reasons - but they still show up on the bank statement.
If sketchy payments, checks, or transfers are found during your reconciliation, you could be the victim of accounts payable fraud. By identifying these payments right away, you can track them down and resolve them much more quickly than if they go undetected for months.
Reconciliations are one of the most crucial quality checks in the monthly and yearly reporting process. Automated reconciliation software can make the rec process much faster and easier, but there are still manual steps that need to be taken.
Knowing these common reconciliation discrepancies will make you more prepared to successfully reconcile your accounts, close your books, and create accurate financial statements.