What is reconciliation in accounting?

Reconciliation is usually understood as matching all transactions in your business bank account with outgoing orders (income) and incoming invoices (expenses). Having tidy books will reassure the tax office and any auditors, lenders and investors you’re working with that your business is healthy. 

For the business owner, reconciled accounts are useful for business processes like cash flow management, tax prepayment, sales tax management, inventory management and forecasting. Even if your ecommerce business is still small, it’s important to get your accounting processes right from the start.

The reason most businesses fail is that they simply run out of money. Balancing the books is the surest way to prevent an entire business from toppling. Monitoring cash flow and making reconciliation easy should be a core part of your business’s ecommerce banking setup.

Reconciliation in accounting explained

Up until very recently, reconciling accounts was an extremely labour intensive process prone to human error. Fortunately, open banking and accounting software has made this process a whole lot easier. The better programs integrate with your bank account and automatically update whenever there is a new transaction. Most receipts are now digital and invoices are usually generated in the same accounting program as your bank reconciliation.

There are two accounting systems – single and double entry. In general, if someone else is doing your books, they’re probably doing double entry. Provided your business earns under a certain threshold and is not incorporated, single entry is likely fine.

In terms of reconciliation, the process is the same no matter which system you run your business on. The difference is the scale.

Most reconciliation happens automatically via AI, assuming you input the invoice or receipt before the transaction is recorded in your bank account – all the more reason to keep your books up to date.

Ecommerce business and accounting reconciliation

So far, we’ve been talking about reconciliation in terms of your bank statement. This is the most common type of reconciliation, but there is another. Essentially, anything can be reconciled – vendors, inventory, customers. In general, whenever there’s a forecasted and actual scenario, reconciling the two is part of the process.

Vendor reconciliation

If you are running a high volume ecommerce that relies on warehousing inventory, you will have to, from time to time, do vendor reconciliation. What you’re checking for is if your vendor has shipped what you’ve paid for and have you paid for what they’ve shipped.

The more returns, alterations, backorders, rush orders and restocks you have, the more likely it is that things will not match 100%. Depending on the terms of your vendor contract, you’ll have to decide how much of a difference is just part of doing business and how much is a problem.

Customer reconciliation

In B2B ecommerce businesses, where it’s more likely that credit will be given to customers, it’s possible that customer reconciliations will need to be done from time to time. Like the vendor reconciliation, you’re checking that the customer has received what they’ve paid for and paid for what they’ve received.

For most B2C ecommerce, customers pay at the moment of purchase, so customer reconciliation isn’t needed. The customer may pay with a credit card or choose BNPL, which is also a form of credit, but since it isn’t your company that’s extending the loan, it’s not something that needs to go on your books. 

Intercompany reconciliation

This type of reconciliation will almost always be done by an accountant. A parent company with one or more subsidiaries will need a consolidated record of accounts for taxes and forecasting. An intercompany reconciliation deals mostly with things like one business loaning cash to another or declaring dividends.

Expense reconciliation and inventory

The two other main types of reconciliation that apply to ecommerce businesses are expenses and inventory. Expense reconciliation is usually travel and hospitality expenses from sales teams and other company events. The process is the same – do the receipts handed in match the payments made?

Inventory is sorting out how much actual product is in the warehouse vs. how much the ledger says there should be. A big discrepancy means there are some pretty big problems in your recordkeeping or inventory control processes.

Staying on top of these types of reconciliation is important for cash flow, valuation and all sorts of other business processes like forecasting and policy development. The more you know, the stronger your business will be no matter what the future brings.

Manage payments with ease with Mollie

At Mollie, we want to make reconciliation effortless. Our dashboard gives you a detailed overview of all payment statuses and integrates easily with all major accounting software. Learn more about our features to make your accounting simple – which will only help grow your business.

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