What is bank reconciliation: the five-minute guide

All companies have accounting operations. Inevitably, they do account reconciliation at period end and most likely it is bank reconciliation. It is safe to say that all businesses do bank reconciliation as their cash streams pass through the banking system.

What is bank reconciliation?

Every accounting department gets incredibly busy towards the end of the month, the quarter or the year, because it is time to close the books. This means double-checking account balances and movements to ensure that everything is posted in the accounting system in a timely and correct manner.

Account reconciliation is part of this verification and double-checking process. It compares internal records with third-party statements and data to check if both corresponding data sets line up. If not, this indicates potential violation of the fundamental accounting principles for preparing the accounts (accuracy, completeness, timeliness, or else) and the discrepancy requires explanation.

Bank reconciliation fits it that framework with the process of matching transactions and bank account balances from the bank statement to internal GL cash account entries. Above all, bank reconciliation is the process of ensuring that the transactions reported by the bank match the records in an organization’s financial ledgers.

However, the bank reconciliation process can be time-consuming and prone to errors. Probably because many accounting clerks still do it manually on printed hard copies or in excel spreadsheets using filtering, search or vlookup functions at best. That approach used to work when bank transactions were relatively few and produced simple one-to-one matches.

Evidently, bank reconciliation today has become much more complex, voluminous and demanding. Eventually, reconciliation accountants have admitted that the old ways of handling transaction matching is unsustainable. Manual reconciliations strain the human resources and carry many risks of human errors.

Fortunately, advancements in technology have brought a solution to this challenge – ReconArt.

Steps in the Bank Reconciliation Process

Reconciling your bank statement against the GL looks deceptively simple and straightforward. After all, ticking off couples of matching transactions from two sets of records should not cause such a fuss. However, the devil is in the details and seemingly mundane operations hide pitfalls. They often require manual intervention, repetitive and time-consuming yet trivial activities, and a lot of back and forth between disconnected tools.

Generally, the structure of the bank reconciliation process looks like this:

• Extracting cash account balances from the internal GL accounts
• Collecting bank statements that refer to the closing accounting period
• File conversion into compatible formats
• Preparing input files with fields populated from the original sources
• Matching comparable fields across two or more columns
• Highlighting unmatched items and documenting the discrepancies from discovery till resolution
• Preparing an auditable workflow of correcting journal entries creation
• Generating a report on reconciliation outcomes according to the requesting department requirements (recurring or ad-hoc)

Challenges in Matching Bank Statements with Cash Accounts

Accountants face several challenges when undertaking the bank reconciliation process. The most common causes of a sluggish and inefficient process, vulnerable to human errors and overwhelming complexity a consequences of:

• dealing with multiple bank accounts, in different currencies
• high and growing transaction volumes, with seasonal peaks
• different bank statement formats that need additional manual entry work or conversion tools
• complex transaction relationships (1-to-many, many-to-many)
• daily frequency of reconciliations (due to heavy workloads or compliance requirements)
• grappling with bottlenecks in disconnected systems

These challenges can lead to cascading impacts at month-end or during audits, where time is of the essence and process structure and logic need to be clear. As a result, chaotic operations can seriously compromise the credibility of the process. The poor visibility obscures potentially impactful financial risks.

How ReconArt makes a difference

First and foremost, ReconArt is a best-in-class bank reconciliation solution built around it robust matching engine. With its unparalleled speed and accuracy, ReconArt reduces the time and effort required for manual reconciliations, allowing accountants to free capacity for high priority tasks.

In addition, ReconArt enables end-to-end automation of all process steps, from file import to reporting. This not only increases efficiency but also improves auditability by providing a centralized and secure environment for all reconciliation activities. The solution is also highly configurable and can accommodate the specifics of any bank reconciliation workflow.

Overall, ReconArt’s best practice SaaS solution streamlines the bank reconciliation process and provides accountants with the tools they need to maintain accurate financial records. Besides bank reconciliation, it is suitable to map any data reconciliation process both in accounting and beyond the financial domain.

Importantly, ReconArt is user-friendly and business user-oriented, so it does not require costly professional services to run. The platform is designed with scalability and adaptability in mind to facilitate long-term usage, process changes and expansions.

Key features of ReconArt for bank reconciliation

ReconArt is an enterprise-class reconciliation tool. It offers a wide array of features to automate every step of your existing bank reconciliation process:

Import and data transformation

ReconArt integrates seamlessly with any external and external data source and system – ERPs, GL modules, accounting systems, banking feeds, etc. We understand the role of your reconciliation solution as a centralized orchestrator of incoming and outgoing financial data streams. Therefore, the flexibility to transfer large volumes of data hands-free and under secure connection is essential.

In the course of reconciliation, accounting deals with input data files of different formats. Their conversion and normalization often is carried out in third-party tools with manual upload and visual validation of the output. ReconArt supports the most frequently used file formats out-of-the-box: XML, XLS, SWIFT MT, camt.053, CSV, ACH and many more. The solution shaves off hours of manual conversion and data entry with its sophisticated data cleaning and enrichment functionality.

Transaction matching

ReconArt as a comprehensive solution originates from its matching engine. Its core capabilities around rule-based transaction matching are key competitive advantage. Users configure their own match rules and allow applying multiple criteria for data comparison, unlike generic spreadsheets. The rules creation does not require technical skills and is quite similar to constructing the familiar Excel expressions.

Moreover, ReconArt supports the most complex matching scenarios like 1-to-many and many-to-many where reconcilers need to drill down into the bulk balances and single out the line items forming it. The software captures the applied matching logic in a granular audit trail to demonstrate its consistency. Reliable match results are of paramount importance in accounting and ReconArt leaves no room for compromise there.

Exception management

Indeed, ReconArt automates the time-consuming matching job in order to shift the focus back to the exception management. Timely identification and investigation of the discrepancies is arguably the main objective of account reconciliation. ReconArt provides functionality around automated classification of unmatched items and grouping of typical discrepancies.

ReconArt supports work segregation and role-based assignment of cases for resolution. Often, legitimate exceptions like fees, charges, taxes are booked in the GL. The platform enables approval workflows for journal entries to ensure items over a certain threshold are properly reviewed upon posting. Any supporting documentation resides in the solution and is ready for retrieval.

Another important feature is the monitoring of transaction ageing. Clearly, highlighting grossly overdue unmatched transaction alerts the team to pay attention to potentially risky situation and take action.

Exports and reporting

Accountants spend a lot of time preparing reports, often in the heat of the close. The reporting capabilities of ReconArt allow generating complex reporting output from any combination of columns in the matching grid. Users can apply sorting, filtering and calculation in the course of report preparation.

The software offers 30+ ready-to-go reports plus automated disseminated via a mailing list. Users can prepare templates for recurring export prepared on a schedule, or extract reconciliation data in ad-hoc reports. Additionally, dashboards in the front page of the solution allow users to arrange a selection of widget for real-time financial insight and clear progress overview.

Benefits and results achieved with bank reconciliation automation by ReconArt

Most notably, ReconArt replaces inefficient manual frameworks and streamlines fragmented operations. Dramatic and immediate time saving are the most noticeable benefit for ReconArt users. The larger the existing workload – the greater the positive effects. In the end of the day, ReconArt improves team productivity and workforce utilization.

In summary, ReconArt serves as and auditable framework for improved control and compliance. Its scalability and versatility aligns with process change and expansion plans. Accountants exercise enhanced control over the financial position and potential risk items. Departments rebalance their efforts in favor of value-added activities like high-level account analysis.