Active management of account reconciliation activities significantly increases executives’ aptitude to proactively recognize and resolve issues that could result in misstatements in financial accounting and reporting records and lead to substantial write-offs. This article explores common, recurring problems with account reconciliations and the practices that can progress their efficiency and effectiveness.
Numerous common account reconciliation difficulties are avoidable. Through creating and putting in place suitable reconciliation and information management procedures, and improving organization, training, and automation, companies can gain declaration over their general ledger balances. Improving the process Since a process standpoint, numerous complications stem from a failure to organize a reliable procedure and terminology. In several cases, an account owner might consider transactions reconciled if the differences have remained enumerated but not determined. In other examples, account reconciliations are simply a roll forward of activity that posted to the account, without an authentication of correctness.
Timing is moreover regularly an issue: account reconciliations that are in arrears more than one month risk misstatement of the financial results.
Another major source of risk rises when action is not taken to resolve open issues or authorize suitable treatment. At some firms, unreconciled amounts within reconciliations endure on an open list for an unspecified period. At others, failure towards examine and resolve recurring difficulties leads to their continued reoccurrence in future periods. Difficulties can also arise when companies recognize reconciling amounts correctly but fail to investigate the reasonableness of their accounting treatment in the financial statements.
Here is what you can do to improve processes:
Justify the number of accounts—the number of accounts in a company’s books frequently increases expressively over the years as a result of new procedures, new objects being formed or assimilated, new transactions, and new people being added throughout the procedure. This frequently results in a larger volume of accounts than would else remain essential. Subsequently more accounts equals a larger workload, management must perform an annual account rationalization exercise to recognize accounts that are no longer obligatory or could be amalgamated with other accounts, thereby decreasing the number of account reconciliations essential.
Create a standard definition of “reconciled” and use it across the firm—Account reconciliations must be more than a roll forward of activity or separation of differences. An account must only remain careful reconciled when differences have been examined, proper accounting treatment determined, and correcting journal entries (if any) posted to the general ledger or sub-ledger. The account reconciliation must begin through comparing the ending balance in the general ledger with the ending balance in the sub-ledger or supporting detail, and it must finish with a matching adjusted balance for each. Reconciling items must adjust the general ledger balance or the sub-ledger as suitable.
Achieve a separate reconciliation for each balance sheet account—organize a separate reconciliation for each general ledger account, containing financial reporting and statutory reporting accounts. Accounts (such as retained earnings) that are just flow-through from other activities must have a separate reconciliation prepared only if alterations exist between the ledger and sub-ledger. Discourage the practice of linking multiple bank accounts or multiple intercompany transaction activities to a single general ledger account, as is frequently done with cash accounts. Instead, preserve separate accounts for separate transaction flows—i.e., receivables and payables without netting balance; separate cash accounts for each bank account; separate bank accounts for each procedure, such as a payroll account, payables account, and receivables account.
Create risk-based standards for the timing of account reconciliations—Stagger the timing of account reconciliations created on probable for fraud or misstatement, income, account history, materiality, volume of transactions, important judgment, essential for regular manual posting of adjustments (as for revenue accruals and deferred costs), and so forth. Contingent on the level of risk, perform reconciliations daily, weekly, monthly, or quarterly. Risk levels and connected reconciliation occurrence requirements must remain reconfirmed at least annually. At Reconciliationaccounting you get an excellent service regarding How to improve account reconciliation Activities
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