In finance and accounting, a reconciliation refers to the process of comparing internal financial records against external sources like bank statements or ledger records of another associated organisation.
They fall into two main categories: investigative reconciliations and extract reconciliations.
It’s this second method which organisations with large transactional volumes, including financial services institutions, favour. An extract reconciliation is where transactions between two related but discreet data sources are compared on an ongoing basis to ensure an exact match.
The reconciliations landscape can be complex – especially for those new to the industry. So, we’ve outlined the main types of reconciliations, the drawbacks of relying on manual processes, and how to overcome some common challenges.
Click on the links below to jump to different sections of the blog:
- Merchant reconciliation
- Purchaser reconciliation
- Bank reconciliation (account reconciliation)
- Intercompany reconciliation
- Other specific reconciliations – including balance sheet, cash, ATM cash, and credit card reconciliations
- The drawbacks of manual processes for performing reconciliations
- How to overcome common challenges
A merchant reconciliation is the validation of an accounts payable ledger with the accounts statement of the merchant. Regular reconciliation ensures the aged creditor records and projected cash outflows are accurate.
Common issues include incorrect entries in the accounts payable ledger; unpredictable and erroneous supply of data from the merchant; and manual comparison and associated operational issues due to the lack of referential data.
A purchaser reconciliation is the validation of the accounts receivable ledger with the invoice statement of a particular client. Regular reconciliation is crucial to ensure the aged debtor records and projected cash inflows are accurate.
Common issues include errors resulting from business considerations like settlement disputes; incorrect entries in the accounts receivable ledger; and legacy entries and adjustment differences within the accounts receivable ledger.
Also known as account reconciliation, this reconciliation is the validation of the entity’s bank statements with its business book of accounts at a transactional level. Regular reconciliation ensures payment and calculation mistakes are immediately identified and corrected.
Common issues include timing differences with the presentation of cheques; issues with settlement of the cheques; and procedural errors when data is recorded at the bank or at the entity.
An intercompany – or intergroup – reconciliation is the validation of the parent entity general ledger with its subsidiaries. It minimises intracompany cash transactions and mitigates the risk of transaction-related banking charges, overdrafts and credit fees. It optimises liquidity management across the group and identifies any accounting nonconformities.
Common issues result from multiple data sets with different formats and data fields; a lack of a single source of referential data; and differing account platforms and legacy systems.
Other specific reconciliations
As well as the four core reconciliation processes listed above, there are a number of specific reconciliations.
Fixed asset or inventory reconciliation
This process is the reconciliation of personal or business property or stock records with physical inventory. Logistics and inventory management companies use it for stock management.
Credit card reconciliation
Similar to bank reconciliation, this process compares physical receipts with credit card statements. Its aim is to ensure fraudulent activities are quickly identified.
Balance sheet reconciliation
This process covers the matching of the closing balances per account on an entity’s books that make up the overall balance sheet. It ensures the closing balances are classified and submitted correctly so the final balance sheet’s accuracy can be confirmed via an auditable lookback.
This checks that the actual cash-in-hand at a fixed point in time matches the cash register. It can involve many low-value transactions for processes like petty cashbox management.
ATM cash reconciliation
This compares client withdrawals against client account statements.
This reconciliation supports the HR department by ensuring all salary, payment and expense claims are properly administered as part of the employee payroll cycle.
It ensures the required alignment to appropriate tax and payee regulations and the final integration of records into the company accounting processes.
Equity reconciliation ensures stock balance records are accurate by comparing the firm’s golden record to other operational data sets.
This process assists in supplying details of a client’s overall financial workflows against prime brokers, counterparties and administrators to ensure payments and position data are accurately captured on a daily basis.
This ensures effective invoice control by comparing paid invoices against outstanding invoices.
The drawbacks of using manual processes for reconciliations
Using manual – even semi-automated – processes to perform reconciliations not only increases risk and error but also wastes time and resources.
More specifically, relying on old-fashioned manual processes results in the following drawbacks:
- Higher frequency of breaks
- Operational inefficiency
- Lack of control and auditability
- Inability to scale or weather economic change
- Reduced operational resilience
- Inability to support modern operating models
- Limited reporting functionalities
How to overcome common challenges: The benefits of automation
The main challenges of the reconciliation process are related to its complex, time-consuming and tedious nature. This can lead to employee dissatisfaction, recruitment issues, and high operational costs.
However, automating the reconciliation process will overcome these challenges by streamlining operations. It can reduce the time spent on reconciliations by over 75% and cut costs by over 50%.
A best-in-class reconciliation solution works with any type of data and processes any reconciliation. This results in improved data control and confidence. It also cuts the risk of regulatory breaches and penalties, ensuring ongoing compliance.
Most importantly, unlike spreadsheets, an automated solution is flexible. So it accommodates both company growth and changing regulatory requirements.
To learn more about AutoRek, visit our automated reconciliation solutions page. Or book a demo with our team.