Financial Statement Reconciliation: What It Is All About
Even the tiniest of mistakes in a small or medium-sized company's cash flow management can spell disaster. After all, small companies don't have much money to work with, and any loss of finances can cause a lot of problems. As such, one must put effort into ensuring all financial statements are kept on track and recorded, and a good way to do this is to carry out a task called financial statement reconciliation.
What's financial statement reconciliation, why is it so important, and how do you do it? Let's talk about that:
What is Financial Statement Reconciliation?
Simply put, financial statement reconciliation is the process of comparing a company's financial statements with an outside source. In most cases, that source is an outside accountant. Financial statement reconciliation is usually done through a thorough review of the company's financial statements and their corresponding amounts in an outside source, such as the government's databases.
Why Is It Important?
One of the most important reasons why financial statement reconciliation is necessary is to ensure that all financial records are kept in order. This increases the accuracy of the information that the company utilizes in running its business.
Also, it is important to make sure that any discrepancies don't go unnoticed. As such, performing a financial statement reconciliation will provide a good visual representation of any differences that exist between the company's information and the data. This helps to identify any potential issues.
How Do You Do It?
Performing a financial statement reconciliation is as simple as comparing two documents from the same period. First, you'll need to find the company's balance sheet and its financial income statement, and then you can compare them with what the outside source shows.
To do this, you'll need to look at the ending balance of assets, liabilities, and equity, as well as at income and expenses. Here, you'll need to make sure that any differences are clearly explained.
For example, if the company's balance sheet shows that it had $5,000 in its accounts receivable, but the outside source showed $3,000, then you'll need to explain why the difference exists. If the company's income statement shows $10,000 in expenses, but the outside source shows $15,000, then you'll need to specifically explain where the extra $5,000 went.
Generally speaking, the most common reason for discrepancies is one of two things: either the company's figures are incorrect, or the outside source is incorrect.
If the company's figures are incorrect, then you'll need to figure out why this is. Did someone input the wrong numbers? Did the company make a mistake? If so, then it's possible that the company's figures should be corrected. If the outside source is incorrect, then you'll need to figure out what happened. Did someone input the wrong numbers? Did the government make a mistake? You should consult an expert to find out the answer.
Financial statement reconciliation can be a very important and helpful way of ensuring that a company is running smoothly. It also ensures that data is accurate, which is a crucial part of running a business.
Conclusion
Financial statement reconciliation can be one of the most important tasks when it comes to managing a business. It can be very beneficial in ensuring that a company's numbers are accurate, which is a very important part of any company's financial health. As such, it is wise to ensure that financial statement reconciliation is always done, and the best way to do that is to make sure the financial statements are always consistent with the outside source.
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