Avoid These 5 Financial Data MistakesAug 28, 2023
What is it and why should you care?
Account reconciliation is the process of comparing statements and other documentation like invoices, payments, and delivery receipts, to recorded transactions in your accounting system to make sure they match and are complete.
This process is essential to have accurate financial data for business decisions.
Depending on the size of your company, you could have a few dozen transactions, a few thousand transactions or anywhere in between.
Your accounting system could be set to download transactions from your various accounts online or each transaction could be added manually, or some of both. Either way, there is still room for error.
What types of accounts need to be reconciled?
Typical accounts include:
- Bank accounts
- PayPal / Zelle / Cash App accounts
- Petty Cash accounts
- Accounts Receivable
- Credit card accounts
- Loan accounts
- Accounts Payable
- Payroll + Sales Tax Liabilities
The account reconciliation process identifies several types of errors so they can be corrected.
Here are 5 common data mistakes found through this process:
No. 1 Missing transactions
I’m sure anyone can think of a busy day at the office where it took all of your energy and focus just to get orders out the door or complete a project on time.
And maybe while you were focusing on the customer, you told yourself that you’d handle the paperwork later.
And then you didn’t.
It happens to all of us at some point.
We get distracted or we’re super busy and we forget to enter an invoice or a customer payment.
Or we had to call an emergency A/C repair company, handed them our credit card, and then forgot to record the charge.
You get the idea…
All of these little things can add up to a large variance in what our financials tell us vs. what really happened.
Account reconciliation catches all of these errors and ensures that your balances are correct.
No. 2 Duplicate transactions
Remember that busy day?
Maybe you did enter the invoice, but you forgot about it and went back later to add it, accidentally duplicating it.
Or, as QuickBooks online does sometimes, duplicate transactions were downloaded into your file, and you didn’t realize it.
Duplication errors also create distorted financials and can have a huge impact on the decisions you make based on them.
Account reconciliation catches these, too.
No. 3 Transactions posted to the wrong account
This one is a little tricky.
It’s less visible because your payment account balance may be correct (bank, credit card, etc.) but your offset account is not. If your offset account is an expense account, you need a good understanding of what your typical monthly expenses are to see a variance on your income statement.
I like to run the Income Statement report for the year-to-date and then show the data by month.
This lets you easily compare the month-over-month changes for each expense account to see if any red flags pop up, like your office expenses are usually around $500/month but this month they jumped to $6500 or one of your expense accounts is negative. It’s definitely worth a few minutes to check and see of those transactions are in the right spot!
Finding errors on the Balance Sheet is a little easier because many of those accounts are reviewed through the reconciliation process. A good example is posting a credit card payment to the wrong credit card. That will jump right out at you when you’re reconciling the credit card.
No. 4 Transactions with the wrong amount or date
A good example of a transaction posted with the wrong amount is a restaurant receipt. Sometimes, the tip isn’t recorded on the customer copy or the total with tip may not be correct. If the receipt was manually entered into the system with the wrong amount, then it won’t match the statement.
This actually can lead to two errors:
- The balance will be off due to the amount error
- If your transactions automatically download into your system, it could cause a duplicate transaction because it can’t match the amounts together – it thinks they are two different charges.
So why are dates so important?
If the charge was on the 23rd and you recorded it on the 24th, it doesn’t, really.
Unless you’re a perfectionist like me!
If the charge happened on the last day of the month and you record it on the first day of the next month (or across years), it does matter.
Financial statements are the window into what happened to your cash and when.
If you’re trying to understand how much it costs to run your business every month, date errors like this can add up.
If you’re crossing years, then they have a tax impact as well.
For example, if you’re on a cash basis and you record a customer payment in December when you actually received it in January, then you’ll be paying taxes on that revenue early (assuming your fiscal year end is December).
No. 5 Payment discrepancies
Let’s go back to that busy day.
You shipped out several orders and processed payments.
Then, you processed some online payments for a few of your open bills.
But you were really busy and didn’t record any payments in your accounting software.
What happens when you run your reports?
Your receivables report is going to show that your customers didn’t pay.
And your payables report is going to show that you haven’t paid those bills yet.
If you’re not reconciling your accounts, this could lead to you asking customers for payments they’ve already made and you paying some of your bills twice!
It’s definitely worth it to reconcile your accounts on a regular basis!
How often should you reconcile?
If you receive a monthly statement (banks, credit cards, loans, etc.) – reconcile monthly.
If you have a large volume of customer and vendor payments, it may be better to review those payments weekly to make sure everything has been applied correctly.
If you carry inventory, it may not be feasible to reconcile your inventory on a monthly basis. Doing so on a quarterly basis or semi-annual basis can be good alternatives depending on how quickly your inventory turns. Another option is to implement cycle counting – breaking down your inventory into groups and then counting those groups on a rolling basis to continuously update your inventory balance.
If you want to learn more about the reconciliation process and how to implement it in your business, check out this article: Implementing Your Month End Close Process
What if you don’t have the time or simply don’t want to do this yourself?
The simple answer is call me!
If you’re using QuickBooks online to manage your financials, Harrington can help!
Here’s how it works:
- Book a free discovery call
- We’ll discuss your situation and see if we’re a good fit to work together.
- Complete your bookkeeping assessment questionnaire. The assessment is used to determine the scope any potential bookkeeping cleanup as well as the appropriate monthly bookkeeping package.
- After the assessment, you’ll receive a proposal for the project with a full scope of work.
- Then it’s up to you!
Learn more about our services here.