Why Businesses Should Reconcile Accounts Monthly

At the end of every month, accountants go through a process to “close the books.” The most important part of this process is to reconcile accounts. There are three main categories of balance sheet accounts to reconcile. 1.) All cash, checking, and savings accounts. 2.) All notes and bank loans. 3.) All Prepaid, Deferred, or Accrued accounts.

Reconcile Accounts: Cash Accounts

First, reconcile all cash accounts. Understanding what the correct booked cash balance is in the accounting system is a must in the monthly close process. To reconcile the petty cash accounts, we make a physical count of the cash on hand to ensure that all cash is on hand. This account should also have a separate register that includes receipts for every expense and use of the petty cash account. Cash is the easiest place to find missing transactions. Usually cash transactions are triggered by some other transaction like paying a bill or receiving money from a customer for an invoice. If we are missing cash transactions, other accounts on our balance sheet may be off.

For example, accounts payable or accounts receivable may be overstated, or that our revenue or expenses are understated. It can also go the other direction; we may have recorded things that never happened. By reconciling the cash accounts, all these mistakes will be caught and corrected.

Reconcile Accounts: Loans

Second, loans should be reconciled to an amortization schedule to make sure principal and interest are recorded correctly for each loan. Each of these accounts will have statements from a financial institution to use during the reconciliation process. Reconciling these accounts will ensure that we have a clear picture of our liabilities. If we apply payments incorrectly to these balances, we will not have a correct picture of what we owe. This can have a huge negative effect on our cash planning by painting an inaccurate picture of our obligations. Reconciling these accounts will ensure that we know exactly how much we owe on these long-term debts.

Reconcile Accounts: Prepaid, Deferred, and Accrued Accounts

Third, prepaid, deferred, and accrued accounts need to be reconciled. Use internal schedules to ensure our balances are correct. Each prepaid, deferred, and accrued account should have a separate schedule that details transactions for each period. By reconciling these accounts, we can ensure that our revenues and expenses are matched to the correct period. According to accounting principles, all expenses must be accounted for in the period in which they are related. For example, expenses are recorded in the period in which services are rendered which is not necessarily the period in which they were paid.

This process of reconciling all the balance sheet accounts is important to ensure the accuracy of the income statement. There are so many moving parts in an accounting system. It can be very easy to forget about something. The only way to ensure that everything is accounted for and not forgotten about is through reconciling the balance sheet accounts. If all of these accounts are reconciled each month, we can be confident that we are getting a clear picture of what is happening in the business. TGG Accounting helps many clients through the month close process. Call us today.

Written by:
Ashley Peth
TGG Accounting

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