Accurate financial information is crucial to the success of any business. But getting it isn’t easy unless an accounting department is set up to catch any potential errors through a checks and balances system of review. And one of the best ways to accomplish this task is through the practice of reconciliation accounting.
Read on to find out more information about how to get started applying it to your company today.
What Is Reconciliation Accounting?
Reconciliation accounting refers to the way that the numbers are checked for accuracy. This is possible by verifying them with the primary source of the information. That means, expenses, sources of income, and inter-company loans can’t simply be recorded. There has to be a paper trail to show how the amount was first achieved. This can be in the form of a copy of the:
- Loan agreements;
- Check stubs that connect to the transactions.
You shouldn’t complete the verification process just once though. After the initial entry is made in the general ledger to show an increase or decrease in the funds that are available for that account, this information has to go into a file. Most small companies use hard copies for this part. However, large corporations with a lot of transactions often scan in everything to save time and paper.
Before the month’s closing process completes, each of the transactions and account balances has to be reviewed a second time by a different person. Having more than one person looking at how the numbers were achieved helps to keep everyone honest. Also, it ensures that a fresh set of eyes can catch anything that may slip through the cracks.
Who Needs Reconciliation Accounting the Most?
All companies need to have some type of reconciliation accounting system. But it is especially important to those who have a large amount of transactions taking place each month because of the nature of their business.
Two examples of this are retail stores and restaurants. This is because they both have a high number of sales tickets and product ordering receipts each day.
How Much Is Usually Spent on Reconciliation Accounting?
One of the best parts about reconciliation accounting is that it is practically free. The only costs that come with it are those in relationship to the salary of whoever is responsible for reviewing and recording the accounting transactions.
However, let’s say that a company doesn’t have any system like this in place. Then, the costs can quickly get out of control. This is because a company will have to hire a forensic accountant to analyze their financial information when fraud or theft occurs. Also, depending on how long the problem has been going on, this can take up to several months.
Forensic accountants operate in a specialized field. Therefore, they charge much more than a regular accountant does. And on top of this, most of them are certified public accountants. This can translate into charges of $200 or more per hour for their work. The fees of the forensic accountant are in addition to the regular payroll costs of the company’s current accounting staff that will have to work with them to accomplish the large process of review.
5 Ways to Successfully Use a Reconciliation Accounting System
Implementing a reconciliation accounting system is a complex process that requires the aid of a skilled financial expert. After the initial cost of setting it up, the company can usually maintain it through the accounting staff. Still, it helps to consider the following tips for some helpful ways to reduce the overall amount that you can spend on it.
- Have all the basic work done by the less skilled staff members. This way, the financial expert won’t have to spend extra time completing them. This includes setting up files, making copies, and organizing papers.
- Ask if the total cost can be paid up front. That way, if there are any complications that arise which require extra time to be spent on the process, it won’t end up increasing the cost.
- If the financial expert will only accept wages at an hourly rate, instead of one set price, then set a time limit on how long that you want the process to take. More often than not, they will be willing to work within your budget constraints.
- Don’t waste time with a long look-back period. Focus only on the current financial year. Changing the way that previous accounting work was done could end up leading to changes in tax returns and important financial reports. However, be ready to make quite a bit of journal entries to reflect the changes to any part of the current year’s work that has already been closed out.
- Come up with a detailed plan of execution before you make any changes. This will ensure that your staff spends less time backtracking to correct errors. It will also help all of the staff members know what tasks that they need to complete and when to do them.
In conclusion, having an accurate reconciliation accounting system is crucial to the financial success of any company. This is because it helps prevent and correct mathematical mistakes. It is also important for reducing the risk of theft by any dishonest employees who might be tempted to take advantage of the company. Implementing a special system like this requires a financial expert though, which can be expensive. So to save money, it helps to use the above tips for keeping the cost down.
And finally, if you have ever worked on reconciling accounts for a company, we would love to hear about any other tips and tricks that you might have that could help other people who are new to the process.
The images come from pixabay.com.