In our previous post, Solutions and Tools to Closing the Books, Part 2, we delve deep into the world of closing books, external reporting, and some of the challenges you might face closing your books. In this post, we take a look at the account reconciliation process, the challenges it brings, and why reconciliations are a critical tool for organizations.
True financial control may evade companies that grapple with the reconciliation process. Many times, the issues with reconciliations are due to an overarching approach for reconciliations, the inefficiencies of obtaining the reconciliation data, the manual process, compiling, and managing the results.
As a general rule, reconciliations are performed on balance sheet accounts, but occasionally are done for income statement accounts, especially in the area of intercompany. Account reconciliation is a process that validates or proves the ending balance of a balance sheet account or proves the activity in an income statement account. A reconciled general ledger, completed according to GAAP, is the cornerstone to understanding a company’s financial status. Reconciliations are not always required, but should be performed regardless, as they are a critical tool for confirming the fiscal health of an organization. Reconciliations and their supporting documentation are stored for review by auditors or for reference if needed in future periods.
Challenges with Account Reconciliations
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Account reconciliation can be seen as the epitome of repetitive, boring accounting work. Each month, an accountant reviews the same account(s) and validates that the balance is correct. Sometimes the balances and adjustments to the account don’t change, but the reconciliation is still opened, prepared, and usually approved by a supervisor. Reconciliations are often labor-intensive, prepared in Excel with the general ledger balance manually keyed in and compared to some other supporting sub-ledger such as accounts receivable or accounts payable, or a supporting document. The supporting document can run the gamut from an external document such as a bank statement or note receivable to a client-prepared spreadsheet like a prepaid rent amortization schedule supporting the general ledger balance.
Once a reconciliation is completed, some companies will print the reconciliation and package it together with the supporting documentation and literally store it in a physical file cabinet, sorted by year and month. More “advanced” companies may have a shared folder where the reconciliation and supporting documentation, sometimes manually scanned and attached to the reconciliation, are stored.
Though time-consuming, reconciliations are typically viewed as easy to do and are only conducted once a month so many companies just “tough it out and get it done.” However, is it the best use of time? Every minute an accountant spends reconciling accounts could be spent performing the role of a financial analyst, analyzing trends looking for potential value to the organization.
To learn more on how to overcome financial close challenges, you can download our entire guide here or below. Otherwise, stay tuned for blog #6 in the coming week!