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Your accounts don't reconcile

The central task of an operations department is reconciliation. Reconciliations are the most basic skill an operations analyst must posses because it lays the foundation for the rest of the role - analysis. There are many reconciliations that an organisation might need.

In this post, let's take a look at the most common income related reconciliations.

Income reconciliations

Ask three people what the definition of income is, and they will give three different answers. A company which prepares financial statements according to US GAAP or IFRS will most likely define income according to those standards. A tax filing will define income as the cash received. So, who is right?

As usual, everyone is right.

Income reconciliations confirm that the balance which will be reported has been earned. Its the definition of earning which varies between standards:

  • According to most accounting standards, income is earned at the time it is delivered. Income is reported at delivery because those using the accounts want to see how much business has been generated separately from its solvency.

  • According to most tax accounts, income is earned when it is paid. Tax authorities are concerned with how much money a business has received, and this is how they assess taxes.

The income reconciliation compares the balances in the accounts to evidence that the income can be recognised. Evidence can include invoices, contracts, and incoming payments. Depending on the company's O2C process and standards, there most likely will be some type of combination of sources. By performing this reconciliation, management can be assured that they can evidence the business's performance.

Debt reconciliations

Debtors are customers who owe payment for services rendered. Debts are mandatory assets according to accounting standards. These reconciliations ensure cash is collected on time, to to support decisions for those who default, and support business operations. They should include an ageing schedule to ensure timely collections.

The balance of debt is supported by open invoices, and these balances are cleared when the payment is matched. Debt reconciliations can be done manually by an operations staff member or by a programmed ERP system automatically. There are many solutions, such as virtual bank accounts which integrate directly into the ERP system and streamline matching. Debt reconciliations do not confirm that balance in the bank accounts, it confirms that all payments have been collected.

A debt reconciliation differs from an income reconciliation because it is concerned with received payment, not delivery of services. A business can have high revenues, but if they do not take payment, the business will fail. The debt reconciliation plays an important control to ensure that services become payment.

Cash and bank reconciliations

Cash and bank reconciliations are the most commonly known reconciliations because most people perform them as part of their own daily lives! Most of us check our bank accounts to ensure that we have received money owed (such as salaries) and that we have only paid for goods and services which we have purchased.

To perform a cash or bank reconciliation, the balance in the bank account or balance in the til is compared to the balance in the accounts. Should there be a difference, the reconcile must review all of the transactions and determine either where the money is or if there's an erroneous transaction in the accounts. Many companies have policies which do not permit staff to leave until cash is accounted.

It is important to understand that this is not an income reconciliation. The purpose of these reconciliations is to confirm that the physical cash balances are reported in the accounts.

The ultimate goal

A reconciliation must support accounts preparation whether they are statutory, management , or tax. Reconciliations do not provide commentary on business performance nor make recommendations on courses of action. They ensure that the figures presented to make those decisions are reliable.

Part of the challenge is keeping the cost to prepare these recommendations low, and Chayim Messer Consulting can advise your company on how to do that. A combination of shared services, technological advancement, and process expertise ensures that reconciliations are prepared quickly and efficiently.

Contact us today for a free consultation.


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