Melio Explains

Melio explains: What’s reconciliation

This is one of the most common terms in the world of accounting, but most small business owners don’t actually know what it means. We’re here to clarify what it is, why you need to do it, and how.

Melio explains: What’s reconciliation

A little bit more about reconciliation:

Reconciliation is the practice of keeping your books in order by comparing accounting records with external documents. It helps you stay in control of your finances. One example of this is it helps you guarantee you’ve been paid for every product you delivered–and that the money in the bank reflects that. To understand the process better, it’s best to look at it from different perspectives–the merchant side and the customer side. We’ll take a look at two businesses and how they reconcile their books.

Danny is an apple and peach farmer from Oregon. His small farm exports fruit to businesses all over the Northwest region of the U.S. His main clientele includes cideries, beverage manufacturers, and bakeries. Most of his customers buy products in bulk so he gives them the option to pay over time, or gives a discount if they pay in advance.

Danny lets customers pay either by check–which they send in the mail–or by bank transfer. Once a month, he deposits all of the checks he has. It’s extremely important for Danny and his business to make sure the bank account reflects the true earnings he has made. Meaning he has to keep track of transactions, and match every incoming payment to an existing invoice. As the payments are usually made in parts, he must also keep track of the bank account so that he knows he’s been paid for in full.

The reconciliation process includes his accountant doing a weekly check of money in and money out. Ben, Danny’s accountant, is looking at any database Danny has for finances, whatever it may be—Google Sheets, payment tools, accounting software, etc. If Danny would have accepted cards, the POS terminal would have been another part of the database. Ben then matches the numbers to the bank account.

Ben can be pesky sometimes, asking for all those invoices again and again. But he’s looking out for Danny. When the bank account is showing discrepancies, that can badly affect Danny. Not only in the form of getting paid less than he deserves, but also by potentially not being able to track all the payments and report income accurately at the end of the year.

Now what about outgoing payments? Do they need to be reconciled? The answer is yes, but this process is easier to do. Reconciliation on the accounts payable side would simply require making sure every invoice you’ve received has been paid in full. This helps maintain good relationships with your vendors, and guarantees that you didn’t pay too much, or to the wrong place.

So let’s take a look at Robert who does property management. He constantly pays electricians, plumbers, exterminators, and so on. To make sure his business runs smoothly, and that clients are charged the right amount, Robert keeps track of every outgoing payment. He saves invoices and marks them as paid or not paid. He can later match those amounts with the outgoing funds from his business’s bank account.

To make sure your books always match your bank account and that everything is organized, we recommend conducting a periodic professional review of your accounts. And it’s always a good idea to hire a professional accountant or bookkeeper to reconcile the books for you. With their expertise, you will find yourself with far fewer errors.

*The purpose of this page is solely to provide information and should not be considered as financial advice
**Melio does not provide legal, tax or accounting advice; you should consult a professional advisor before making any financial decisions.