Accounting
Read time 3 minutes

Understanding the Principles of Reconciliation and Their Importance in Financial Accounting

Business activities require continuous reconciliation processes to ensure the accuracy of the figures presented in the company’s financial statements. However, for a business owner to know how to conduct reconciliation correctly, they must be familiar with the principles of the process, the best timing for performing it, and various factors that help achieve accurate results.

What is the Reconciliation Process?

Reconciliation is the procedure of matching a cash account in the company’s balance sheet with the corresponding information in a bank statement through bank synchronization. The goal is to identify any discrepancies between the two and analyze changes that may affect the bank account.

The best time to conduct this process is during regular, predetermined intervals, typically at the end of each accounting period—monthly, quarterly, or annually. This ensures that financial reports, such as the income statement and other important financial statements for business activities, are accurate and up-to-date.

The accounting system has been integrated with the bank; for instance, Wazen is now integrated with Al Rajhi Bank by linking the ERP system with the bank. This ensures automatic daily reconciliation of the bank statement, as the system reads the bank statements, records the accounting entries, and matches the statements, among other banking integration tasks.

Importance of Reconciliation in Financial Accounting

Merchants and business owners need to perform bank reconciliations, especially given the numerous financial transactions that occur in business activities. This process is essential to ensure that the balance in their bank account matches the amount recorded in their financial records within the accounting system. There are several situations that make reconciliation an indispensable procedure, including:

      Identifying Errors or Fraud: Unintentional manual errors can lead to discrepancies in a merchant's balances, and fraud may also be a factor. Through reconciliation, it becomes possible to pinpoint the source and reason behind all financial transactions.
      Investment or Expansion: If a merchant plans to open a new branch of their business, they must first ensure there are sufficient funds available for investment in marketing or research, which can be confirmed through reconciliation.
      Accuracy of Financial and Tax Reports: If a merchant’s sales exceed a certain threshold, they are required to submit a tax report monthly or every four months. This necessitates performing bank reconciliations to ensure the accuracy of the figures, thereby avoiding penalties from the Zakat, Tax, and Customs Authority.

Identifying Errors or Fraud: Unintentional manual errors can lead to discrepancies in a merchant's balances, and fraud may also be a factor. Through reconciliation, it becomes possible to pinpoint the source and reason behind all financial transactions.

Investment or Expansion: If a merchant plans to open a new branch of their business, they must first ensure there are sufficient funds available for investment in marketing or research, which can be confirmed through reconciliation.

Accuracy of Financial and Tax Reports: If a merchant’s sales exceed a certain threshold, they are required to submit a tax report monthly or every four months. This necessitates performing bank reconciliations to ensure the accuracy of the figures, thereby avoiding penalties from the Zakat, Tax, and Customs Authority.

Subscribe now to the Wazen program and enjoy professional services that help you manage your company or business efficiently, freeing up human effort for other tasks that require greater focus. Among these services is the reconciliation task, which Wazen provides with a high level of accuracy. So don’t hesitate to take advantage of it and start managing your operations with ease.

Finally, we invite you to explore the Wazen Business Operating System by taking advantage of our free 14-day trial. During this period, you can learn more about the details, services, and features of the Wazen system for business operations.