Annual Reconciliation for Book Closing

What is reconciliation?

In accounting terms, reconciliation refers to comparing two sets of financial records to check the accuracy and viability of the data. It helps to identify discrepancies between two data and make adjustments to correct them. Reconciliation is a crucial accounting practice every business performs monthly, quarterly, and annually. It helps businesses to track financial records and promote transparency.

Reconciliation is a vital part of any business or personal financial management. It helps to ensure the accuracy of the data reflected in the financial statement, which shows the financial position of any business or individual. It helps to rectify any discrepancies or errors caused due to fraud, which helps the investors and stakeholders get an overview of their investment plans.  

Common accounting reconciliation examples include bank reconciliation or any internal financial records filed in the system. A Tally of bank entries is done to check whether all the entries are shown properly and whether the entries are present in the records. The other internal financial records check is done between the financial records of one company and another entity, such as a supplier or customer, to match the records.

When is the process of reconciliation done?

Reconciliation is a monthly, quarterly, and annual process by businesses or individuals. Annual reconciliations are done mostly at the end of any given financial year. In heavy and regular transactions, businesses prefer carrying out their reconciliation process at the end of every month or quarter. It helps maintain day-to-day records, ensuring no missed entries and discrepancies are generated. This results in accurate and reliable data, helping the business make vital financial decisions.

Why should the reconciliation of books of accounts be carried out?

All businesses or individuals are bound to perform the activity of reconciliation because of the following reasons:

Accuracy: Accuracy is the key factor for any business. Reconciliation helps to maintain the accuracy of all financial records. By comparing and tallying the data, the accountants can easily close the entries pending against the bank records.

1. Avoid Frauds:

While reconciling the records, accountants catch an eye on any unusual transactions or records not carried out by the company or falsely shown in the books of accounts. This helps prevent any fraudulent activities carried out by any company officials or other external sources. Reconciliation is a big help for businesses whose financial credentials are hacked, and unusual activities happen on their accounts.

2. Improved Decision–Making:

Finances can be called the heart and blood of any business. Every financial entry, however small or huge, is to be recorded in the books of accounts, and reconciling those helps the top management to make accurate and sound decisions related to investments, budgeting, and cash flow management.

3. Regulatory Compliance:

There are various legal obligations in terms of financial management for businesses to follow in order to run the business. Reconciliation is often required by regulatory authorities to ensure compliance with accounting standards. Reconciliation also helps regulatory authorities ensure businesses comply with their legal obligations and no financial frauds are taking place within the businesses.

4. Avoid Penalties:

Indian taxation system ensures that businesses reconcile their records on a timely basis and returns are filed as per the instructions given by regulatory authorities. If any business fails to submit timely returns and timely reconciliations, the penalty is charged per the Indian Accounting Standards.

Below is a brief of things to be taken care of while reconciling books of accounts. 

• Reconcile bank accounts and credit card statements for the entire year.
• Verify that all expenses have been recorded in the correct accounts.
• Confirm that all income has been recorded in the correct accounts.
• Check that all payroll and related taxes have been accurately recorded.
• Review inventory levels and perform a physical inventory count if necessary.
• Verify that all fixed assets are correctly recorded, and depreciation has been accurately calculated.
• Review all outstanding accounts receivable and accounts payable to ensure they are accurate.
• Check that all sales taxes have been collected and remitted accurately.
• Prepare financial statements, including a balance sheet, income, and cash flow statement.
• Review the financial statements and investigate any discrepancies or unusual items.
• Close the books for the year and make any necessary adjustments.
• Back up all accounting data and store it in a secure location.
• Schedule an annual audit or review by a qualified accountant or auditor.
• Plan for the upcoming year and set goals for financial performance

Checklist for reconciliation of books of accounts:

As discussed above, reconciliation is an important part of any business, and all accountants are required to reconcile many books and transactions to keep accurate records, hence following is the checklist any accountant can follow while reconciling books of accounts:

1. TDS Deductions:

TDS is Tax Deducted at Source. TDS is to be calculated on certain invoices generated for the business. Generally, the 7th of every month is the date for making due payment against TDS provisions. Accountants are required to verify whether the TDS for specific transactions has been deducted and paid to respective accounts. No pending entries against the TDS deductions should be found while reconciling, and if found, adjustments should be made against such entries.

2. Accounts Receivable:

To tally the receivables and incomes, the accountant should have receipts of all the invoices generated by the company to their suppliers. All the entries should match the invoices generated and payment made against all the invoices. Adjustment of entries where the source is not detected is to be carried out, accounts from pending payments are to be verified, and entries should be made accordingly. All party-wise accounts should be tallied and closed.  

3. Accounts Payable:

There are multiple transactions where payment is yet to be made against any invoice issued in the company name, such entries are to be completed by making the payments, and receipts of all expenses should be tallied against the payment made. All party-wise accounts should be tallied and closed. No suspicious payments should be made, and such entries should be taken care of by the accountants to avoid any discrepancies.

4. Reconciliation of all branch offices:

Businesses run on a large scale requires modern account management software in order to maintain proper and accurate records. Every business has similar software in all their branch offices. Hence, the reconciliation of statements of all the branches is easy and viable. All transactions and entries should be matched and tallied to file returns and close the given yearbooks of accounts.

5. Bank Reconciliation:

Bank reconciliation is crucial because no errors can be found where banks are involved. Various foreign currency transactions require the closing of BRC within a specified period. If not completed, RBI must be involved in resolving such cases. The after process is tedious in case you miss the deadlines. Hence, bank reconciliations done monthly are highly preferable.

6. Closing Stock Verification:

In the case of manufacturing facilities, closing stocks must be verified by the company official physically as it is to be carried forward to the next financial year. Item quantity-wise stocks should be checked, verified, and mentioned in the tax audit reports.

7. Loan & FD Statements:

While starting the reconciliations, all loan and fixed deposit statements should be collected from the bank, and all entries should be made. Proper entries for loan interest paid and deposit interest received are to be made to calculate the receivables against the payables. All active loans, overdrafts, cash credits, and fixed deposits should be taken into account while reconciling.

8. Payroll Provisions:

TDS must be deducted from the employee’s account if they fall under the taxable limit. In such a case, every employee must submit a declaration claiming specific expenses against their taxable income. Accountants should consider these declarations and deduct the TDS of employees accordingly for the said financial year. If any employee fails to make a specific investment, he will be liable to pay the tax liability, and the TDS amount will be deducted from his salary.

9. GST ledger Balances:

Balances as per the GST ledger (Electronic cash ledger, electronic credit ledger, and electronic liability ledger) and company books of accounts should match the given financial year-end. All advances on GST in case of services provided should be paid and recorded to the customers as of the last date. Accountants should ensure that the GST paid on the invoices at applicable or lower rates should be re-checked and recorded to claim exact GST refunds.

10. GST Refunds:

Accountants should ensure companies have filed for GST refunds before the deadline to avoid any penalties or let go of their GST balance amount. Generally, 2 years is the limit for applying for any refund.

11. Depreciation on Fixed Assets:

Accountants should ensure that depreciation on companies’ fixed assets should be calculated per Schedule 2 of the Companies Act, 2013. Depreciation is to be calculated accurately and mentioned in the books of accounts.

12. Generate E-invoicing:

The government has made it mandatory to issue e-invoices for companies making yearly turnover above Rs. 20 crores. This has come into effect from 1St April 2022. Hence, accountants should ensure that all e-invoices are generated for the company to claim ITC at the end of the year. E-invoicing for companies making turnover above Rs. 500 crores, Rs. 100 crores, and Rs. 50 crores had been made mandatory w.e.f. 1St October 2020, 1St January 2020, and 1St April 2021 respectively.

13. Input Tax Credit:

Accountants should verify that all GST inputs are recorded in GSTR-2A/2B. If any inputs are not shown in the GST portal, the respective supplier should be informed, and changes should be made before the financial year’s end for the company to claim ITC.

14. PF/ESI registrations:

PF/ESI registrations should be tallied, and if any new recruitments are done, the employees should be added to the PF/ESI scheme if applicable. In case of companies are not registered and new recruitments have been made, then the accountant should make sure to register the company and employees under the PF/ESI scheme.  

15. Tax Liability:

Companies must pay taxes as per the new tax regime. Companies pay advance taxes in order to miss the deadline and avoid paying interest; hence companies should make sure the advance taxes in the ledger are adequate and pay the taxes as per the tax regime to avoid penalties and interest under section 234B of the Income Tax Act, 1961.

16. GST reconciliations:

There are various returns to be filed before the year’s end. Such GST returns are to be paid quarterly and monthly. Following is the list of GST returns to be compulsorily filed and matched with the books of accounts:

• Reconciliation of GSTR-3B

• Reconciliation of GSTR 1

• Reconciliation of GSTR-2A/2B with GSTR-3B

• Reconciliation of GSTR 1 with GSTR-3B

17. Concessional GST

Exports of goods made under the LUT, i.e., Letter of Undertaking agreement, should have all documents necessary for submission. Proof of exports should be received and recorded to avoid any last-minute chaos and penalty. Also, the foreign exchange difference in the case of exports/ imports should be recorded properly.

18. Backup Data:

Create a backup of all accounting data to ensure it is secure and can be retrieved in case of loss or damage. It is very important as financial data is all a company is working on.

Conclusion

Year-end closing for books of accounts can take time and effort. Still, it is very important to ensure all the entries are recorded properly and all adjustments are made against the entries on hold to ensure the company follows all legal procedures. The company is carrying out no suspicious activities. Some companies make a lot of fake adjustments to reduce their tax liability. In such cases, the accountants should ensure that the company follows all legal obligations and regulations per the government standard.