Is Account Reconciliation Enough?
In the realm of financial management, the significance of account reconciliation as a tool for evaluating an organisation’s financial health is undeniable says Naomi Breetzke, Payment Consultant at Synthesis. It allows organisations to gain insights into their cash position, liabilities, and assets, facilitating informed decision-making.
The challenge lies in determining whether reliance solely on account reconciliation leaves potential gaps in ensuring the accuracy and completeness of financial records.
Despite the efforts undertaken through efficient account reconciliation, organisations can still find themselves vulnerable to specific challenges, such as inaccuracies in cash flow, increased fraud risk, errors, and disputes with vendors where debtor and creditor payments are not properly contained and reconciled.
While account reconciliation provides a comprehensive overview of various financial accounts, payment reconciliation zooms in on the verification of payments and associated documents.
It is not uncommon for businesses to prioritise general account reconciliation over payment reconciliation.
This article aims to highlight the importance of payment reconciliation and describes the nuanced distinction between account reconciliation and payment reconciliation.
It has been noted that in some sources, account reconciliation and payment reconciliation are considered synonymous, a perception this article seeks to clarify and differentiate.
What is the difference between account reconciliation and payment reconciliation?
Account reconciliation and payment reconciliation are related concepts, but they are not entirely interchangeable, and there are some subtle differences between the two.
While both account reconciliation and payment reconciliation involve the process of comparing records to ensure accuracy, account reconciliation is a broader term that encompasses various financial accounts, while payment reconciliation is a more specific process focused on verifying payments and associated documents.
Payment reconciliation entails reviewing not just the payments recorded in the cashbook or cash account but also considers both current and future anticipated payments. This includes situations where there is awareness that a current amount reflected in the cashbook will remain unpaid in the coming days. When executed effectively, payment reconciliation offers valuable business insights into the anticipated liquidity position, providing a snapshot of what the financial landscape will look like, for example, in the upcoming week.
For ease of comparison, the two concepts are laid side-by-side in the table below:
| Account Reconciliation | Payment Reconciliation |
| Purpose, Scope | |
| Account reconciliation is a broader term that encompasses the process of comparing and verifying various financial accounts and records. | Payment reconciliation is a comprehensive process that involves the meticulous comparison and validation of various financial records and accounts related specifically to payments. |
| The primary purpose of account reconciliation is to confirm that the balances and transactions in different financial accounts or records match. | The main purpose of payment recon-ciliation is to ensure that payments made by the organisation align with invoices or expenses that were authorised and that the amounts match. |
| Examples of account reconciliation include comparing the general ledger with subsidiary ledgers and verifying that bank statements match the cash account in the organisation’s records. | Examples of payment reconciliation include comparing payments recorded in the accounts payable system with invoices received from suppliers, verifying that employee expense reimbursements match receipts and policies, and reconciling customer payments with their corresponding invoices. |
| Frequency | |
| Typically, it is performed monthly or quarterly. There is a new tendency to undertake daily reconciliations. | Typically, it is performed daily or weekly to best aid liquidity positions. |
| Error Detection, Fraud Detection, Fraud Prevention | |
| The identification of discrepancies and errors in financial records by comparing two sets of financial data e.g., bank statements with an organisation’s records makes it possible to spot mistakes. These include double-entry posting, missing transactions, mathematical errors, and unauthorised withdrawals, which could indicate fraudulent transactions. | Payment reconciliation allows for the detection and resolution of over- and under-payments, duplicate payments, and billing errors. It is also vital for detecting and preventing fraudulent activities such as unauthorised payments or fictitious invoices. |
| Auditing, Compliance, Financial Reporting | |
| Compliance with generally accepted accounting standards and regulations often requires thorough account reconciliation. Regulatory bodies for some industries mandate regular reconciliation. | Payment reconciliation is often a requirement for financial reporting compliance, particularly for publicly traded companies and those subject to specific regulatory frameworks. |
| In cases of legal disputes or tax audits, having well-documented and reconciled financial records can provide legal protection. It also simplifies the auditing process by providing a clear audit trail for investigation or auditing purposes. | Accurate reconciliation ensures that financial reports are in accordance with accounting standards and legal requirements and provides a clear and comprehensive audit trail for financial transactions. |
| Cash Flow Management | |
| For businesses, reconciling accounts, especially bank accounts, is vital for effective cash flow management. It allows the tracking of funds movement, monitoring income and expenses, and facilitating informed decisions about how to allocate resources. | Accurate payment reconciliation is crucial for effective cash flow management. It allows businesses to track outgoing payments, predict future cash needs, and ensure that sufficient funds are available to meet financial obligations. |
| Cost Savings | |
| Organisations that maintain accurate financial records through regular reconciliation may face fewer issues during audits. This can result in reduced audit-related costs and fees. | The prompt identification of errors and proactive resolution of discrepancies in financial transactions not only ensure accuracy but can also result in cost savings. Suppose a vendor invoice is erroneously inflated when captured into the system and is subsequently paid. Without prompt identification and resolution, this error would have caused a financial discrepancy and affected the cash flow negatively resulting in say, overdraft interest being levied. |
| Budgeting, Planning | |
| Account reconciliation aids in the budgeting and planning process due to up-to-date financial data, for more realistic and effective financial planning. | Accurate payment reconciliation contributes to more precise financial forecasting. Organisations can better predict future cash flows and plan for contingencies with confidence, leading to more realistic budgeting. |
| Changing Payment Landscape | |
| It is noteworthy that the same level of transformative change in the payment landscape does not seem to apply to account reconciliation. Account reconciliation methods appear to remain relatively stable over time requiring businesses to maintain proficiency in established practices rather than continuously adapting to new and intricate financial transaction processes. | The evolving landscape of payments, marked by the surge of online payment services and the potential rise of cryptocurrency, underscores the growing complexity of payment reconciliation. This dynamic shift necessitates businesses to cultivate a new skill set among their staff, as traditional methods may no longer suffice in navigating these intricate financial transactions. |
As mentioned earlier, both accounting reconciliation and payment reconciliation play vital roles in financial processes, each fulfilling unique yet interrelated purposes. Together, these processes significantly contribute to efficient financial management, regulatory compliance, and informed decision-making within an organisation.
In conclusion, it is crucial to underscore that omitting payment reconciliation will compromise your business. While account reconciliation gives you the comfort of knowing where your business is today, payment reconciliation will give you the comfort of knowing where your business will be tomorrow.
So, is account reconciliation enough? No, there is a need to prioritise payment reconciliation as well. Doing both is the strategic key that unlocks the door to a robust and resilient financial future for your organisation.
Please feel free to reach out to the Synthesis Payments Centre of Excellence for further information.
Author:
Naomi Breetzke
Payments Consultant at Synthesis
