Reconciliation is a fundamental accounting process that will ensure your financial records are accurate and complete. But it is surprising how many businesses do not undertake them.
What is it? Reconciliation is the process of comparing accounting records to supporting documentation (for example, the bank balance on the balance sheet to the bank statement) to ensure they match, if not, further investigation is required to figure out why.
There are several reasons why a variance may arise. For example, missing transactions – often a new bank account or credit card is opened and the direct feed of transactions to your accounting software is not established, which results in missing transactions. Timing differences or the lag in direct feeds to the accounting system may also cause variances, for example, an automatic payment may go out of the bank account on the last day of the month, but may not show up on a supporting document until the following month.
It is good practice to ensure your accounts are reconciled throughout the year, whether weekly or monthly. A good ‘rule of thumb’ is to complete a full balance sheet reconciliation in-line with your GST filing periods. This would involve reconciling balance sheet accounts, for example, bank balances, debtors and creditors, GST, inter-entity accounts, etc. to supporting documentation each time a GST return is filed. If an unexplained variance is identified, it will be easier to pinpoint if you know the opening balance has recently been confirmed.
Reconciling your transactions in a timely manner will improve the quality of a business’s financial information which will assist in decision making, as profitability and cashflow can be accurately monitored. For example, are debtor days too high, or are supplier relations being impacted by delayed or incorrect payments? Regularly verifying the numbers is also a good way to spot incorrect payments or suspicious activity.
In addition to bank account reconciliation, it is also important to reconcile the GST account to Inland Revenue’s records. This will identify any unfiled amounts to be included in a future GST return or any outstanding liabilities which need to be paid. The income tax and PAYE balances at the end of each period should also match Inland Revenue’s system. Interest and late payment penalties can be mitigated if accounting records are up to date.
Computerised accounting systems make the reconciliation process much more efficient and makes a once mundane process, a lot more ‘enjoyable’ (for those closet accountants out there). An additional benefit of periodic reconciliation is that it will streamline your end of year accounts process and ensure the financial statements can be prepared in a timely manner.