What Is Cash Reconciliation?

Reconciliation isn’t just recommended — it’s a required task for any business that handles cash in order to complete the month-end close process. But it also provides a variety of other important benefits that can help your business maintain proper financial well-being. Unless you’re a completely cashless business or organization, cash reconciliation is required to complete the month-end financial close. Doing so not only allows you to ensure financial accuracy, it’s also essential for risk management, compliance, and fraud detection. Additionally, it demonstrates transparent and ethical business practices. 

In this guide, we provide an overview of cash reconciliation and explore tools and resources you can use to help automate and streamline the process.

What Is Cash Reconciliation?

Cash reconciliation is the process of comparing two sets of financial records — records such as bank statements versus the physical amount of actual cash on hand. This process, regardless of industry or geographic location, is necessary in order to complete a business’s financial close at the end of the month.

What Systems Are Involved in Cash Reconciliation?

Cash reconciliation involves numerous systems to help ensure the efficiency and accuracy of managing cash transactions.

• Point of sale system (POS): A point of sale system is a combination of hardware and software that allows merchants to process customer payments.
• Property management system (PMS): A property management system is a software application that allows businesses to manage the day-to-day operations for a business, most often for hotels and commercial residential rental properties. A PMS may automate and manage common tasks such as checking in and out, point of sale integration, security and room locks, and bookings.
• Cash management system: Maintaining an accurate cash flow is important, and a cash management system can help track, record, and report the metrics, ensuring that information is accurate and easily accessible.
• Banking system: This system is used to track all cash deposits, transfers, and withdrawals. Bank statements are used during the reconciliation process.
• Accounting or enterprise resource planning (ERP) system: An ERP system is a type of software that allows businesses to manage day-to-day functions, including accounting, procurement, risk management, compliance, and project management. 

How Is Cash Reconciliation Performed?

This is a general guideline of the typical cash reconciliation process:

1. Gather appropriate documentation. This includes everything from your POS/PMS, bank statements, and receipts.
2. Ensure all transactions have been recorded appropriately. Whether you have automated accounting software or you manually enter data, it’s important to make sure that everything is documented in the appropriate place.
3. Compare transactions. Look at each transaction on the bank statement and ensure it aligns with the entries in your system.
4. Look for any errors or mismatched information and investigate discrepancies. This can include typos, duplicate entries, missing data, or unusual transactions. Keep outstanding items, such as checks that haven’t cleared, in mind. 
5. Generate journal entries to be pushed to the general ledger. At the end of the reconciliation process, you will create formal accounting records that detail the specifics of each transaction; these will then become part of the general ledger.

Cash vs. Credit Reconciliation

Though the reconciliation processes are similar, there are some distinct differences. 

Credit card transactions involve automation or manual gathering from card processors that are reconciled against the POS/PMS.

While reconciliation involves transaction matching, it also includes something called the “exception audit” — meaning that items will not match 100% since there are two sides to the process: audit (what the credit card company reports in terms of daily transactions) and payment (what the PMS/cashier reported for the day).

Credit card reconciliation also needs to account for transaction/processing fees.

The Benefits of Cash Reconciliation

Although reconciliation is a necessary business practice for maintaining financial health and accuracy, it also offers several key advantages.

• Error detection: Failing to regularly reconcile cash increases the risk of errors, which can lead to added time, frustration, and even significant financial setbacks.
• Fraud prevention: Consistent reconciliation enables you to quickly identify — and hopefully mitigate — potential instances of fraud. By comparing transactions against POS and PMS data, you can easily spot missing funds or other suspicious activity.
• Improved financial accuracy: The ultimate goal of reconciliation is to ensure your cash balance aligns with your records, which is important for accurate reporting of revenue, expenses, and cash flow.
• Efficient cash flow management: Knowing your cash on hand at any given time allows you to accurately plan for expenses and allocate resources.
• Compliance with regulations: Accurate financial records are essential for audits and tax filings, and reconciliation helps ensure they are up to date.
• Enhanced decision-making: Accurate cash balances can enable leaders and executives to make better decisions in terms of expenses, growth opportunities, and investments.

Cash Reconciliation Example

Here’s a quick example to demonstrate the process:

Company Name: ABC Retail
Period: August 2024

Step 1: Record cash transactions

Beginning cash balance (as of August 1): $10,000
Cash sales: $5,000
Cash expenses: $2,500
Cash deposits to bank: $5,500

Total cash transactions:

• Cash inflows: $10,500 (cash sales + cash deposits)
• Cash outflows: $2,500 (cash expenses)

Step 2: Calculate ending cash balance

Ending Cash Balance:

• Beginning cash balance: $10,000
• Add: cash inflows: $10,500
• Subtract: cash outflows: $2,500

Ending Cash Balance = $10,000 + $10,500 – $2,500 = $18,000

Step 3: Compare with bank statement

• Bank statement ending balance (as of August 31): $17,500

Step 4: Identify discrepancies

• Ending cash balance (from records): $18,000
• Ending bank balance: $17,500
• Discrepancy: $500

Step 5: Investigate discrepancy

• Possible reasons may include:
  • Outstanding checks that haven’t cleared yet (e.g., a $500 check issued but not yet cashed)
  • Bank fees or errors in recording transactions

Step 6: Adjust records

• If the discrepancy is due to an outstanding check, the cash balance would be adjusted as follows: Adjusted cash balance: $18,000 – $500 (outstanding check) = $17,500

Final step: Confirm alignment

After adjustments, both the adjusted cash balance and the bank statement balance align at $17,500, completing the cash reconciliation process.

Tools and Resources for Cash Reconciliation

Leverage automation to accurately and quickly reconcile so your staff can spend time managing exceptions versus manually matching transactions. Cash recyclers, for example, automate the process of counting, sorting, and dispensing cash. These systems also provide real-time data on transactions and drawer balances.

When looking for the right solution, consider one that’s fully automated and allows you to be hands-off so that you and your employees can spend more time doing what matters most — taking care of your guests. Human error costs businesses $61.4 million per year, demonstrating how automated tools have the power to save thousands of dollars, which could mean the difference between financial success or failure, especially for smaller- to mid-sized companies.

Look for a software platform that offers automation and transaction matching, which will help reduce errors and save valuable business hours.

And speaking of time — what’s even better is a program that reconciles and generates reports overnight so that your employees are equipped with the data, insights, and information they need at the start of their day.

At the end of the day, you want a solution with customized reporting and detailed insight so that you have full visibility into your cash transactions. And it’s also important to find a system that seamlessly integrates with your PMS/POS and provides a user-friendly interface.

Discover the Power of Total Recon – Cash Reconciliation

If you’re looking to streamline your accounting processes or upgrade your existing technology, consider Evention’s Total Recon – Cash Reconciliation solution, which automatically reconciles your cash transactions overnight while enabling full compliance with detailed reports for a complete audit trail. Plus, it works with a cash recycler or as a standalone option! If you’d like to learn more, just request a free demo and we’ll reach out to schedule a time to talk.

Interested in learning more about cash and credit card reconciliation? Our free eBook — Your Complete Guide To A Better Cash & Credit Card Reconciliation Process — provides best practices for cash and credit card reconciliation and addresses common challenges you’re likely facing during the process.