What Is Financial Reconciliation and Why It Matters at Year-End

Invoices get input twice. Payments from customers get applied to the wrong account. Checks get deposited and cleared after they’ve already been recorded in your books.

While these discrepancies may not seem like much, at year-end, they can have a big impact on your financial statements and taxes. An error can also become more difficult to find once it’s been sitting for longer periods of time.

Reconciling your finances allows you to figure out what took place and ensure you are ready for year-end.

What you’ll learn:

1. What Is Financial Reconciliation?
2. Why you should reconcile at year end
3. What accounts should you reconcile at year end?
4. Steps to take when reconciling your accounts
5. Tips to help speed up your year end close

What Is Financial Reconciliation?

When reconciling your financials you are taking your accounting records and verifying them against an outside source. Once verified, any variances should be researched.

One of the most common types of reconciliation is a bank reconciliation. You take your bank statement and reconcile it to the cash account in your general ledger. Verifying all of your deposits, disbursements, bank charges and checks that have not yet cleared your bank.

Something to keep in mind when reconciling is that not all discrepancies are errors.

If you recorded a check in December that cleared your bank in January, you have created a reconciling item. But if you did not record a bank charge, you will need to enter that into your books.

You don’t want to adjust your books just to make the balances match. You want to know what matches, what doesn’t and why.

This concept can be applied to many areas of your books. Credit cards, customer accounts, vendors, payroll, loans, etc.

Suppose you are reconciling a vendor statement to your accounts payable. You notice there is a bill that the vendor recorded, but you didn’t receive. You would want to investigate this further to see what happened. You wouldn’t modify the vendor’s statement to reflect your books.

Why you should reconcile at year end

At the end of the year you want to know that all transactions were posted to your books and accounted for. Having your accounts reconciled will allow accountants to prepare financial statements with a little more assurance. They can also verify how much is due to certain parties.

When paying contractors it’s important to reconcile your books. If you apply a payment to the wrong vendor, you will have the wrong balance at year end. Before preparing your 1099s, accountants should reconcile contractor payments, make sure the correct name was used and determine if the payment was reportable for that year.

Once these amounts are determined, year-end reporting software can be used to file W-2 and 1099 forms. Electronic filing is also available through an add-on. If you have many clients, it’s beneficial to have a program like 1099 software for accountants. However, that is only helpful if you reconcile your books to begin with.

Having discrepancies that weren’t researched at year end can take more time as well. According to APQC, organizations in its benchmark had a median annual close at 18 days. While this includes more than just reconciliation, it can affect your year end process.

It also allows for better decision making. If your owner wants to know how much cash you have, bills outstanding and how much customers owe you, it’s always better to know these amounts were verified.

What accounts should you reconcile at year end?

Any account that you feel can affect your cash, liabilities, revenues, expenses or taxes. These can vary by company, but here are some to start.

• Bank and credit card accounts. Reconcile all statements up to your year end date. Remember to identify any outstanding checks, don’t assume they weren’t deposited.
• Accounts Receivable. Reconcile your customer sub-ledger to your general ledger. Look for payments that weren’t applied, credits or possibly customers you should follow up with.
• Accounts Payable. Reconcile to vendor statements and open bills. Make sure there aren’t any bills recorded that shouldn’t be in your books.
• Payroll and Contractor. Reconcile to your payroll reports and any payments made. Check for unpaid payroll liabilities.
• Loans and Fixed Assets. Make sure your loans and interest are up to date with the lender. Verify any fixed assets added or sold.
• Payment Processor. Many businesses use a third party to accept payments. Make sure to reconcile the amount that was paid to you and sales/refunds. You may notice a discrepancy because of fees charged and when money is paid to you.

These are just a few examples, there are many more accounts that you may need to reconcile at year end. Just make sure any significant account can be accounted for.

Steps to take when reconciling your accounts

As you can see, there are many steps involved. Here are some things to remember when completing your reconciliation.

Determine what you are reconciling and what period.

Once you’ve identified your year end date, you want to gather all the documentation that you need. Bank statements, invoices, receipts, payroll reports, etc.

Remember you want to be comparing the same period. If you reconcile your cash account to December 31st, your bank statement will need to be for that month as well.

Compare transactions, not just your ending balance.

Whenever possible, compare individual transactions. Errors can cancel each other out and your balance may look right, but your transactions aren’t.

Your bank statement shows $12,400 and your book balance shows $12,000. You may have a check for $400 that you recorded, but hasn’t cleared your bank yet. So you wouldn’t record another expense.

Research any discrepancies.

You will need to figure out if the discrepancy is due to a timing issue, duplicate, or if there is a missing entry. Always make sure to verify the date. An expense may pertain to December, but wasn’t invoiced until January.

Do not leave amounts in a suspense account to get your year end closed.

If something has been outstanding for a long time, you may need to reach out to your bank, customer, or vendor.

Record any necessary adjustments.

Once you have determined that an error was made, make your adjustment. Document the reason and any back up. Also, who performed the reconciliation.

Again, do not record entries to equal out discrepancies. This can cause another error in your next period.

Have someone else review your work.

If possible, have someone else verify that you reconciled correctly. Note any open items and when they should be cleared.

Save your reconciliations and back up. It will save you time when you need to reference them later.

Tips to help speed up your year end close

If you find yourself struggling with year end, try doing some of these tasks during the year.

Reconcile your bank and credit card statements monthly. You will have less to research when it comes to year end.

Schedule time to go through your customer and vendor balances. You can ask for missing documentation sooner. If you have contractors, make sure to update their information and classify payments properly.

Create a list of what you need to complete for year end and who is responsible. Give yourself some time to review once it’s completed.

Keep track of any discrepancies you weren’t able to research and note when you will follow up.

While there are many programs out there to help with year end, you will still need to research discrepancies.

Conclusion

There you have it, a guide to help you reconcile your finances. As you can see, there are many steps to take, but if you follow these guidelines your year end close should go smoother.