In any particular business, account reconciliation is important
and vital. Sometimes, there may be account misappropriations and
misrepresentation of accounting data. This may lead to wrong placements
of costs or expenses thus wrong information. Mainly, the data may have
been ignored or misappropriated thus the need to place it back to the
right accounts. The process of placing the accounts in order, whereby an
amount is deducted from one account and added to another is referred to
as account reconciliation. Most people do not regard account
reconciliation as a major problem since it happens often with costs that
are miscellaneous and that are rare to be incurred by the business.
They cause confusion as to where they should be placed especially if the
accountant is not experienced.
There are several reasons as to why account reconciliation is important. These include:
I. For management purposes. The management has a huge task of explaining the daily operations of the business or company thus unless they know where the money went, they cannot be able to effectively manage the business. Every expense that is made from the business must be accounted for and from the right accounts. Most businesses have departments which have their own accounts that they run from. At the end of the year, they must be able to account how they spent the money and whether it was effectively used to meet the needs of the business. The managers in these levels must then provide this information to the general accountant who now verifies the total expenditure of the business. If any expenses are wrongly placed, the departments responsible have to reconcile their accounts to know where it was spent.
II. For planning the next business year. In order for the business to run effectively, it has to know how much it spent and how much it made. Basically, they have to know the profit margin. At times, the sales may be made prior to the end of the year before the accounting information is made public thus when the information is availed, there may be need for account reconciliation. This will include the most recent sales that were made towards the end of the financial year. As such, it will help the management to plan on how they intend to carry out the management roles it has effectively within the financial constraints it has.
III. For proper budgeting. Budgeting is an important thing that every business must have. Basically, before each business year begins, most businesses prepare their budget. It details how they intend to spend their money. At the end of the year, there is need to counter check on whether actually the money was spent as required and if any unexpected costs were incurred they must be indicated and accounted for. Basically, there will be need for account reconciliation so as they fit in and explain the differences between the budget and the actual expenses.
Account reconciliation is sometimes a tricky affair thus many businesses require that steps be made to ensure that there are minimal instances. However, it is common and is hard for businesses to avoid.
There are several reasons as to why account reconciliation is important. These include:
I. For management purposes. The management has a huge task of explaining the daily operations of the business or company thus unless they know where the money went, they cannot be able to effectively manage the business. Every expense that is made from the business must be accounted for and from the right accounts. Most businesses have departments which have their own accounts that they run from. At the end of the year, they must be able to account how they spent the money and whether it was effectively used to meet the needs of the business. The managers in these levels must then provide this information to the general accountant who now verifies the total expenditure of the business. If any expenses are wrongly placed, the departments responsible have to reconcile their accounts to know where it was spent.
II. For planning the next business year. In order for the business to run effectively, it has to know how much it spent and how much it made. Basically, they have to know the profit margin. At times, the sales may be made prior to the end of the year before the accounting information is made public thus when the information is availed, there may be need for account reconciliation. This will include the most recent sales that were made towards the end of the financial year. As such, it will help the management to plan on how they intend to carry out the management roles it has effectively within the financial constraints it has.
III. For proper budgeting. Budgeting is an important thing that every business must have. Basically, before each business year begins, most businesses prepare their budget. It details how they intend to spend their money. At the end of the year, there is need to counter check on whether actually the money was spent as required and if any unexpected costs were incurred they must be indicated and accounted for. Basically, there will be need for account reconciliation so as they fit in and explain the differences between the budget and the actual expenses.
Account reconciliation is sometimes a tricky affair thus many businesses require that steps be made to ensure that there are minimal instances. However, it is common and is hard for businesses to avoid.
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