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Think of accounting reconciliation software like balancing your checkbook. It is the process of matching transactions recorded in one account against those recorded in another account.
This ensures that all transactions are accounted for and can help businesses detect discrepancies and irregularities. Reconciliation software makes the process easier and faster, but it can be done manually if necessary.
When do companies reconcile their accounts?
Businesses usually reconcile their accounts on a monthly basis, but it varies by the business. Reconciling accounts can help businesses detect discrepancies and irregularities in transactions, ensuring that all records are accurate. It also allows them to keep better track of where money is going, which will let them make more informed spending decisions in the future.
During accounting reconciliation, businesses compare their bank statements with their own internal records to ensure they match up. If there's a difference between these two sets of information, they need to figure out why before moving forward with any financial books or reports.
There are different techniques for reconciling entries depending on what type of documentation each company keeps.
How does accounting reconciliation work with double entry bookkeeping?
There are different techniques for reconciling entries depending on what type of documentation each company keeps. With double entry bookkeeping, the technique is called "T-accounting."
This means that if two sets of books (such as a bank statement and a business's internal records) don't match, the first step should be to create T-accounts for each entry in both sets of books.
Once those accounts balance out, the next step is to look for where the discrepant amounts came from. For example, maybe there were multiple deposits or withdrawals during the time frame analyzed. Then you would need to figure out which entries show up in only one set of books and not the other.
There are two main causes of discrepancies between a company's internal records and their bank statement. The first is specific transactions that only show up on one set of books, but not the other.
For example, maybe you have received a check from a customer but haven't processed it by the time your bank sends over your account information for reconciliation.
Or perhaps there was a deposit into your checking account that you don't have documentation for yet. The second cause is timing differences - if your records indicate that money was spent in January, but there isn't proof of what it went towards until February, then there will likely be an extra transaction on your February bank statement.
When companies reconcile their accounts, they can figure out where any discrepancies in transactions are coming from. If there was a check written in January that you don't have documentation for yet, but it appears in your February bank statement, then it's likely that someone signed the check before the end of January and still needs to deposit it into your account.
This accountability will allow you to keep better track of where money is going. It can also lead to changes in spending habits that will ultimately save you money over time by putting an end to unnecessary debts or fees.