What is Bank Reconciliation?

At its simplest level, bank reconciliation is the process of matching transactions recorded in the company’s general ledger to transactions on the bank statements. It treats the bank statement as the ultimate source of truth so transactions in the general ledger should ultimately result in a corresponding cash event.

Why is Bank Reconciliation Important?

Bank reconciliation is a key internal control tool that can help prevent and identify fraud, errors, and missing items before financial statements are reported. It is a core part of the close process that gives comfort to key accounts on the financial statement.

Questions From the Customer

‍We just passed an audit. Even if the bank reconciliation number doesn’t match, what risks can the company be exposed to?

Companies can pass audits with an out-of-balanced bank reconciliation as long as the out-of-balance amount is not material. If the unreconciled balance were material, auditors would test that balance to ensure that the values can be validated.

By leaving unbalanced values in a bank reconciliation, the company has only prepared a temporary solution and might be exposed to more risk than expected for two reasons:

1. Without identifying the break in data and process, there is a likelihood that out-of-balance values will continue to grow and become material in the future. It will be significantly harder to reconcile all the records later than to have a good process in place now.

2. Allowing any tolerance for out-of-balance amounts exposes the company to potential systematic errors and fraud, so it's always better to identify where the data breaks.

What Are Some Best Practices Around Bank Reconciliation?

In the past, bank reconciliation would take place after the close of the period and after the bank statements had been received. However, with the availability of bank data in an accounting system on a daily and sometimes hourly basis, companies are no longer limited to waiting until the end of the period to reconcile their bank accounts.

A more frequent reconciliation cadence can help identify issues sooner rather than later and allow the team to be more proactive in addressing issues as they arise. Blue Onion supports clients who reconcile their bank accounts on a daily or weekly cadence and who then typically do a full review at the end of the month.

Because bank reconciliation is a core part of the close process, being current can make for a significantly faster time to produce financial statements — with teams doing more of a review of all the data than a manual and time-consuming exercise at the end of the period.

Depending on the company’s size and resources, teams may want the individual performing the bank reconciliation to be different than who records the transactions in the general ledger or processes cash receipts and disbursements as an extra level of internal controls and checks.

Why is Bank Reconciliation Difficult in Companies That Accept Credit Card Payments?

Companies that accept credit cards as a form of payment tend to have additional complexity when it comes to bank reconciliation, due to:

High Transaction Volume

‍If a company accepts credit cards as a form of payment, they tend to have a high volume of order transactions. This means that there is a large volume of orders (or invoices) that need to be matched to a cash settlement in the bank account. More orders typically mean more opportunities for errors and depending on the volume may not even be possible to reconcile each order manually.‍

Batch Settlements

‍When a payout occurs, companies don’t see a single payment for each invoice. Credit card payments are batched so the company may see a large lump sum settle into the bank account that includes thousands of individual orders. Within that settlement, there are also payment processor fees, foreign currency adjustments, refunds, and chargebacks, which add to the complexity of reconciliation.

Multiple Payment Sources

‍This is more common for consumer businesses where they’ll offer multiple options for payment methods, including Buy Now, Pay Later (BNPL), PayPal, and gift cards, in addition to a traditional credit card processor. This means that accounting teams need to reconcile daily cash settlements from multiple payment sources, adding to the time for bank reconciliation.

Generally, What Type of Issues Will Companies Run into When Doing Bank Reconciliation?

Bank reconciliation issues tend to manifest themselves as unknown growing balance sheet accounts, specifically clearing accounts or accounts receivable in relation to reconciling orders to cash settlements. Because reconciling each individual order to a payout in the bank account can be extremely difficult to nearly impossible manually, it can be challenging to investigate the root cause of the issue.

The root cause can vary but we tend to see discrepancies between data in the order system and the general ledger. These differences can be a result of several issues such as unreliable data connectors between systems, incorrect order mapping, or manual processes that occur in one system but not the other.

‍How Does Blue Onion Help with Bank Reconciliation?

Blue Onion helps accounting teams reconcile orders to their cash conclusion in the bank account. With our sophisticated data engine and powerful algorithms each order is automatically matched to a payment in the corresponding payment processor, which is then matched to a payout in the bank account.

We take one of the most painful parts of bank reconciliation and automate it so companies know exactly what orders have been settled into the bank account, including any fees and chargebacks that need to be captured in the general ledger. This eliminates the need for complex and error-prone Excel workbooks and allows teams to close the books faster and more accurately. An accurate and timely reconciliation process also provides visibility into cash that is still in transit, which can be crucial for managing cash balances and predicting cash flow.

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While we are a team of former accountants, we are not in the business of providing professional services. The information presented is for informational purposes only and is not intended to be a substitute for professional accounting, tax, or legal advice. We recommend that you consult with a qualified accountant, tax advisor, or lawyer who is familiar with the specific needs and nuances of your business.

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