You think you owe a supplier 180,000 TL. The supplier says 195,000 TL. Where does the 15,000 TL difference come from?
This difference might seem small today. However, if left unnoticed for months, it grows, becomes complicated, and turns into a problem that takes days to resolve.
Reconciliation is a routine that catches this difference before it grows. In this article, we explained how to perform a reconciliation, the reasons for discrepancies, and the method of establishing this routine.
Table of Contents
What is reconciliation, and why is it necessary?
Reconciliation is the comparison of records kept by two parties for the same commercial relationship. The goal is to verify that balances match or to find the cause of any discrepancy.
Every commercial relationship is recorded in two sets of books simultaneously. Your receivable is the other party's payable. Both records should tell the same truth.
In practice, divergences are inevitable. Timing of records, return transactions, and forgotten documents create discrepancies.
The value of reconciliation is catching these differences early. A one-month discrepancy can be found; a one-year discrepancy is often impossible to find and is closed at a loss.
Furthermore, reconciliation is your strongest document in case of a dispute. A balance confirmation signed by the other party cuts short subsequent arguments.
With whom and how often?
It is not practical to reconcile with all current accounts. Priority should be determined based on volume and risk.
Monthly reconciliations are appropriate with customers and suppliers with whom you work in high volumes. This group is usually small in number but makes up the majority of the balance.
Quarterly reconciliations for medium-volume accounts and annual reconciliations for low-volume accounts are sufficient.
Aside from these, certain situations make reconciliation mandatory: an account that has been inactive for a long time, a customer experiencing collection issues, or a supplier with whom the relationship has ended.
Period-end and year-end closings are also standard reconciliation times; the request from your financial advisor usually comes during these periods.
How is reconciliation done?
The process begins by notifying the other party of your balance as of a specific date. This notification is usually made via a reconciliation letter.
The letter must clearly state the date, the balance amount, and the direction of the balance (debit or credit). Vague wording is misconstrued by the other party.
The other party either confirms the balance or reports their own figure. Once confirmed, it is done; when a discrepancy is reported, the investigation begins.
For investigation, a statement comparison is carried out. The transaction lists of both parties are placed side by side, and missing or extra records are searched for.
Having document numbers and dates on the statement speeds up this comparison significantly; a list containing only amounts makes comparison difficult.
Six reasons for discrepancies
1. Period difference. An invoice issued at the end of the month was recorded by the other party the following month. Both parties acted correctly, but the balances diverge.
2. Payment in transit. A transfer sent but not yet credited to the account. An outflow appears on one side, while the inflow does not appear on the other.
3. Unprocessed document. An incoming invoice has not been recorded. This is the most common and easily preventable reason; refer to the inbox management article.
4. Returns and discounts. One party recorded the net amount, while the other recorded the gross amount. It is also common for a return invoice to be unprocessed on one side.
5. Exchange rate difference. Using different exchange rates in foreign currency transactions generates amount deviations.
6. Wrong account. A payment or invoice was posted to another account. This error becomes more frequent when working with group companies.
Method for resolving discrepancies
Following a sequential method in discrepancy investigation yields much faster results than random searching.
The first step is to look at the discrepancy amount itself. If the discrepancy is exactly equal to an invoice amount, that invoice was not processed on one side.
The second step is to examine transactions at the period boundary. The last three days of the month and the first three days of the month are the intervals where period differences concentrate.
The third step is to check return and correction documents. These documents are frequently skipped and remain one-sided.
When a discrepancy is found, a correction is made and the reconciliation is repeated. For small discrepancies that cannot be found, it is necessary to determine a tolerance policy; searching indefinitely is not efficient.
Preventing the discrepancy from the start
The best reconciliation is the one where no discrepancy arises. Most discrepancies can be prevented with three habits.
First, processing incoming documents daily. A pile of accumulated boxes is the biggest source of reconciliation discrepancies.
Second, closing payments on an invoice basis. Merely reducing the balance leaves it unclear which invoice was paid and makes comparison difficult.
Third, description discipline. Having reference information in both the payments you send and receive makes matching definitive; bank transfer management you can check the article.
Ensuring that current account cards are accurate and duplicate-free is also a fundamental condition; if the same company has two cards, the balance is already split. Opening a current account card see the article.
Establishing the routine
Reconciliation creates value when it stops being a task done in moments of crisis and turns into a scheduled routine.
A practical schedule can be set up as follows: reconciling with the top twenty current accounts in the first week of the month, and following up on discrepancies remaining from the previous period in the third week.
Reconciliation results must also be recorded. It should be trackable with which current account a reconciliation was made and when, and what the result was.
Non-responding current accounts should be followed up separately. A customer who does not respond to reconciliation is often a signal of collection risk.
Current account transactions and statements in the finance module are kept; lists standard list experience filtered with.
Frequently asked questions
Is reconciliation legally mandatory?
It is an expected practice in certain situations; consult your financial advisor for your own obligations. Commercially, it is beneficial at any scale.
What happens if the other party does not respond?
A record of the notification must be kept. A lack of response serves as an element supporting your own records in the event of a dispute.
What should be done for minor discrepancies?
It is common practice to set a tolerance and close discrepancies below that threshold by recording a correction; clarify the method with your financial advisor.
How is it handled in companies that are both customers and suppliers?
The two balances should be tracked separately, and the offsetting transaction must be recorded additionally; transfer you can refer to the article.
Reconciliation is one of those tasks that, when neglected, silently accumulates and turns into a major problem one day. When done regularly, it consists of just a fifteen-minute check.
To start, select the ten current accounts with the highest balances and perform a reconciliation this month. Note the reasons for any discrepancies that arise; most likely, the same three reasons will repeat.
When those three reasons are corrected, the number of discrepancies decreases significantly in subsequent periods. This is the true benefit of reconciliation: not finding the discrepancy, but preventing its repetition.
By consulting the EQLEM team you can set up your reconciliation routine and current account tracking system.