What is an Account Reconciliation
Account reconciliations are activities performed by accountants, typically at the end of an accounting period, to ensure the general ledger account balance is complete and accurate. Generally, account reconciliations compare the general ledger balance of an account to independent systems, third-party data, or other supporting documentation to substantiate the balance stated in the general ledger.
Why Account Reconciliations Are Necessary
Account reconciliations are an important step to ensure the completeness and accuracy of the financial statements. More specifically, companies must reconcile all balance sheet accounts that could contain a significant or material misstatement. Doing so allows entities to identify and post all necessary adjustments to the general ledger in a timely manner.
Additionally, the reconciliation process is an important part of the internal control environment. Section 404 of the Sarbanes-Oxley Act mandates that public companies include an assessment of their internal controls over financial reporting with their annual report.
Many organizations are unable to complete the reconciliation process in a timely manner, which introduces risk. Companies that adopt a more automated, Continuous Accounting approach benefit from a reduced risk of misstatement and a more preventive control environment.
What Are the Steps in Account Reconciliation?
The account reconciliation process is generally carried out after the close of a financial period:
- Accountants go through each account in the general ledger of accounts and verify that the balance listed is complete and accurate.
- This involves comparing the general ledger account balance with independent systems, third-party data, or other supporting documentation, such as bank and credit card statements.
- When discrepancies are found, accountants investigate and take appropriate corrective action.
- This may involve making journal entries to correct balance errors.
- All information found, analysis performed, and actions taken are stored for audit purposes.
The account reconciliation process must be completed before a company can certify the integrity of its financial information and issue financial statements.
What Causes Reconciliation Discrepancies?
Discrepancies may be identified in the reconciliation process. They may be caused by a variety of factors including timing differences, missing transactions, or mistakes.
There may be instances where activity is captured in the general ledger but not the supporting data or vice versa, which may be due to a timing difference. For example, while performing an account reconciliation for a cash account, it may be noted that the general ledger balance is $100,000, but the supporting documentation (i.e., a bank statement) says the bank account has a balance of $110,000.
Upon further investigation, it is identified that the Company wrote a check for $10,000 which has not yet cleared the bank. As such, a $10,000 timing difference due to an outstanding check should be noted in the reconciliation.
There may be instances where activity is captured in the general ledger but not the supporting data or vice versa, which may be due to missing transactions. For example, while performing an account reconciliation for a credit card receivable account, it may be noted that the general ledger balance is $180,000, but the supporting documentation (i.e., credit card processing statement) has a balance of $200,000.
Upon further investigation, it is identified that four transactions were improperly excluded from the general ledger but were properly included in the credit card processing statement. As such, a $20,000 discrepancy due to the missing transactions should be noted in the reconciliation and an adjusting journal entry should be recorded.
There may be instances where a mistake or error causes a discrepancy between the general ledger and the supporting data. For example, while performing an account reconciliation for a cash account, it may be noted that the general ledger balance is $149,000, but the supporting documentation (i.e., a bank statement) says the bank account has a balance of $149,900.
Upon further investigation, it is identified that the company recorded bank fees of $1,000 rather than $100. As such, a $900 error should be noted in the reconciliation and an adjusting journal entry should be recorded.
How Does Account Reconciliation Software Work?
Account reconciliation software automates all the steps in the account reconciliation process. It takes in data from various sources of financial information, such as ERP systems, bank files or statements, credit card processors, and merchant services.
It then compares account balances between these sources, and identifies any discrepancies so they can be investigated by accounting staff. This removes the burden of manually performing this task, and frees accountants to focus on analyzing discrepancies.
Account Reconciliation software features include:
- Automated review and approval workflows with proper segregation of duties
- Reconciliation templates and checklists to standardize processes
- Integrated storage of supporting documentation for easy review and audit
- Links to applicable policies and procedures for easy reference
What Solutions Does BlackLine Offer?
BlackLine Account Reconciliations is designed to streamline all aspects of the account reconciliation process. It adds proper controls and automation, imports data from any source, and is compatible with all major ERP systems.
Configurable validation rules allow for the auto-certification of low-risk accounts, significantly reducing the workload of accounting staff. When discrepancies do exist and require analysis, customizable templates, checklists, and integrated storage for supporting documentation ensure that reconciliation processes are standardized across the organization.
BlackLine Transaction Matching further automates processes by enabling the comparison and validation of transaction-level account data. This allows accountants to view the exact transactions that are not matching in various systems and statements, decreasing the time spent locating discrepancies. This is particularly useful for high-volume reconciliations, such as credit card reconciliations.
Finally, when correcting journal entries are required, the BlackLine Journal Entry product automates this portion of the process as well.
3 Audit Benefits of Account Reconciliation Software
Standardized Templates in the Cloud
Templates are designed to replace error-prone spreadsheets, allowing accountants to perform reconciliations within the BlackLine software. Accountants can automatically roll-forward items, attach support, and eliminate formula errors. For example, an amortizable prepaid template guides the preparer to enter specific details, including the prepaid name, total amount, and to and from dates, which automatically create an online amortization schedule in BlackLine.
Throughout the life of the prepaid, if the month-end GL account balance matches the expected balance in BlackLine, the account is auto-certified.
Auto-certification is a notable benefit in BlackLine. Organizations can configure rules based on their internal policies and controls to further optimize the account reconciliation process.
This approach increases control globally and at the account level, allowing organizations to implement thresholds and set the frequencies automatically.
Accountants are freed from worrying about incomplete or messy reconciliations and can instead focus on the high-risk accounts, analysis, and adding strategic value to the organization.
Out-Of-The-Box Segregation of Duties
One of the challenges of a manual reconciliation process is accountability. With no automation around workflow and no reportability of status, it’s difficult to ensure policies are adhered to and work is being completed timely by the appropriate resources.
Accountants must manage workloads individually, set calendar reminders, and follow up with managers via email to complete reconciliations on time. Leadership must then rely on word of mouth or manual checks to ensure policies were properly followed.
BlackLine, on the other hand, automatically tracks and manages assignments, workflow, status, and due dates. The system also captures a complete audit trail, so a record is always available of who prepared, approved, and reviewed a reconciliation, along with the date and time the action occurred.
And what’s more, BlackLine automatically enforces segregation of duties. The same person cannot prepare and approve a reconciliation—an essential point of control.
Substantiation & Supporting Documentation
Ever spend hours at the copy machine scanning and copying supporting documents for audit purposes? What about organizing those papers or looking through binders and digital folders to find them—and then sending them off to a third-party storage site once they’ve reached a certain age?
And what if a document is missing or incomplete—a control issue for auditors to feast on.
With BlackLine’s cloud platform, supporting documentation is easily stored and accessible at the item or account level, so you never have to go searching again. The uploading user’s name and the date and time is automatically recorded with the attachment, and no one else can edit information.
Furthermore, BlackLine allows you to group like accounts together, so supporting documentation can be attached once rather than duplicated for multiple accounts.
Lastly, read-only access to BlackLine can be granted to auditors, eliminating the need to provide supporting documentation separately. This self-service approach allows auditors to view completed reconciliations and access the support they need for testing and assessing controls on their own.
How to Effectively Implement Account Reconciliations
Time and time again, we’ve seen organizations that approach implementation with a narrow scope create more challenges down the road. This stems from the mentality of, “let’s fix account recs today and worry about streamlining variance analysis tomorrow.”
For example, Company A wants to improve verification, simplify audits, and enhance internal controls, so they implement BlackLine’s Account Reconciliations solution. In the rush to get through the implementation process and minimize disruption, the organization opts for a limited data import, thinking, “we don’t reconcile these accounts, so let’s not import those files.”
But this approach doesn’t save time. In fact, it creates more work, now and in the future.
Company A may have streamlined reconciliations with a “quick implementation” approach, but when they’re ready to add more functionality—like Variance Analysis—they’ll need to import their data (and likely, more of it) all over again.
And each subsequent software implementation, instead of getting easier, requires more time, more money, and more effort.
Leadership expert Stephen Covey’s adage, “begin with the end in mind,” isn’t just sage advice for individuals. It’s also great advice for anyone implementing accounting software solutions.
Organizations that approach streamlining the financial close with a big-picture mentality realize that the very first software implementation—be it a solution that auto-certifies reconciliations or one that matches millions of transactions—is the most critical.
These companies address key issues in the beginning by importing all their data, fixing broken processes, identifying and addressing long-standing discrepancies, and preparing accountants for ongoing (but manageable) change.
Read this blog to learn more about how your organization can improve the account reconciliation process.