What Is Bank Reconciliation Automation and When Is It Worth It?

Bank reconciliation involves ensuring the transactions in your accounting system match those on the bank statement. The aim is to identify discrepancies. Traditionally, this was done manually. A bookkeeper would review the bank statement, find the corresponding entry in the ledger and mark it as reconciled. With hundreds or thousands of entries, the work can become repetitive.

Automation doesn’t alter the fundamental accounting principle, but it does change how the process is carried out. Software is used to import bank data and compare it with existing records according to set rules. While the bookkeeper will still have to spend some time reviewing anything unmatched or unusual, routine comparisons no longer have to be done manually.

The Australian Taxation Office recommends regular reconciliation; it helps a business keep complete records, better understand cash flow and reduce the time spent preparing tax returns and activity statements.

How Does Bank Reconciliation Automation Work?

Automated reconciliation follows a sequence.

Importing the Data

First, transaction information from the bank is imported into the accounting system through a direct feed or file import. The advantage is that there’s no need to manually enter the transaction into the ledger prior to review.

Finding a Match

The software will then cross-reference the bank transaction with existing records. A $450 customer payment might be linked to an open invoice of the same figure, or a monthly $89 subscription may be recognised from its description. The system uses the available details, date, amount, account information, and will either suggest or make a match based on the controls in place.

Applying Matching Rules

Routine matters are handled by matching rules which tell the system how to handle transactions. One rule may allocate a recurring charge to the right expense account while another might identify customer receipts that match invoices. These rules need to be precise enough to avoid classifying unrelated items incorrectly, but broad enough to avoid making the same decision repeatedly.

Reviewing Exceptions

Not every transaction should be accepted without review. Where there’s no corresponding entry or the figures don’t match, the item is left for human review. Unusual cases often call for more than the software can determine from a bank feed. The Department of Finance in Australia states that quality assurance is essential for large or complex reconciliations.

Why Automate?

It isn’t simply about speed. The real value lies in reducing the repetitive work of keeping accurate records.

With less manual data entry, there’s a lower chance of transcription errors, something the Department of Finance has noted as an efficiency gain. Automated systems also allow for faster identification of exceptions; instead of reviewing a long list to find what needs investigation, routine matches are cleared, making outstanding items easier to identify. And with documented rules in place, the processing is more consistent and less reliant on an individual’s judgement about how to treat a given transaction.

Automation isn’t for every account. If a company has a small number of simple transactions, a manual approach is sufficient. But for high volumes of recurring transactions, bank reconciliation automation is a useful tool. Month-end is a time when it’s important to be thorough; left unattended, an unresolved transaction can easily be lost in the mass of routine entries.

When Does Bank Reconciliation Automation Become Worthwhile?

Generally, when the reconciliation consists of a high volume of predictable transactions. Take a company that processes hundreds of customer payments a month. Where those can be matched to invoices with confidence, software will reduce manual work compared with reviewing each transaction individually. The logic holds for any business with regular transfers or other expenses that are part of an established pattern.

When Does Manual Reconciliation Still Have Its Place?

The availability of automation doesn’t mean it’s always appropriate. For an account with few monthly transactions, the time saved by an automated workflow may not justify the cost and administration.

A foreign currency issue, an adjustment across several accounts or a transaction requiring unusual accounting treatment may not fit a simple matching rule. Here the concern isn’t whether the software can identify a matching amount, but whether the transaction is properly evidenced and recorded.

Some organisations have trust arrangements or multiple clearing accounts that complicate things; the business needs to understand how they work before putting in place automated rules, as a poorly designed system could obscure an existing problem. A high rate of exceptions also indicates that the underlying records or descriptions need to be addressed first.

What to Check Before Automating

It’s worth reviewing the process. Review the chart of accounts and the reliability of your bank feeds. Assess how many of the month’s transactions are predictable and how often the bookkeeper has to do a manual investigation. Also consider who’s reviewing the exceptions and how the evidence is being kept.

ASIC requires companies to retain financial records, such as ledgers and statements, for a minimum of seven years, so record-keeping is a key consideration. The goal is to leave repetitive work to the system and retain human oversight for everything else.

Controlling the Matching Rules

Don’t simply set and forget your rules. A rule that works for one recurring supplier could be wrong if their billing changes. Good practice is to document what the rules do, limit who can change them and test them after any changes to the accounting system. You want controlled automation, not uncontrolled automation.

Making the Decision

Consider the relationship between transaction volume, repetition and exceptions. If most of the work is repetitive, automating the reconciliation process makes sense. If judgement is required for most entries, use the manual approach. Let the system deal with anything that fits the criteria and have the bookkeeper review anything that doesn’t.

Ultimately, automation should be an aid to the process, not a substitute for accounting judgement. The system can flag likely matches and import data, but the bookkeeper remains responsible for ensuring the final records are sound. A high-volume, consistent account can make the review process more efficient. With a smaller or more complex account, manual reconciliation may be more practical.