The Importance of Cash Reconciliation (2024)

Traditional cash registers may have ceded checkout space to sophisticated point-of-sale (POS)systems — with orwithout cashiers — but ensuring that the amount of money collected from customersmatches a business’scorresponding sales receipts remains as important as ever. Cash reconciliation, typicallyconducted at the end of aworker’s shift or at the end of the business day, is the process of comparing the cashon hand to the recordedcash transactions. The amounts should match. If they don’t, a business must determinewhy and, if unable toreconcile, properly account for the loss in its financial record.

To avoid a similar outcome, businesses should make sure they understand the steps involved incash reconciliation,best practices to support the process and the advantages of automation. Of note,“cash” refers not onlyto physical currency but also to checks, credit and debit cards, electronic fund transfers,digital wallets andmobile payments, such as Venmo.

What Is Cash Reconciliation?

Cash reconciliation is a type of accountreconciliation that verifies thatreceipts from sales transactions made at the point of sale equal the amount of physicalcash, checks and other formsof payment found in the POS terminal. If the totals don’t align — say, forexample, a register comes up$300 short as compared to its sales receipts — a business must determine why andproperly account for the lossin its financial records.

Key Takeaways

• Cash reconciliation detects inconsistencies in the amount of cash a business has on handand its internalfinancial records, aka sales receipts.
• Cash reconciliation is a multistep process that helps reduce the likelihood of errors ormisrepresentations in acompany's financial statements.
• A cash reconciliation sheet is a financial document used to document discrepancies andadjustments.
• Automation can free staff from performing most of the mundane steps involved in cashreconciliation.

Cash Reconciliation Explained

To err is human. Mistakes at a physical register or POS terminal can happen for a multitudeof reasons. For example,a clerk might miscount change (doling out too much — perhaps two bills stuck together— or too little),accept a counterfeit bill or enter the wrong payment type. Theft can also occur, be it atthe hands of the clerk ora manager who counts the till at the end of a shift. Outdated software that, for example,incorrectly calculateschange or an error occurring during payment processing are other possibilities. But nomatter the cause, the endresult will be a discrepancy between the amount of money in the register and the tally ofthe register’s salesreceipts.

Cash reconciliation is the process of comparing the cash on hand to the recorded cashtransactions at the end of theday or a person’s shift. If the amounts don’t match, even after a recount, amanager, business owner oraccountant will need to investigate the cause and, if the discrepancy can’t beresolved, credit or debit theappropriate general ledger (GL) account.

Cash Reconciliation vs. Bank Reconciliation

Bank reconciliation isanother type of account reconciliation thatlooks at both incoming cash (deposits) and outgoing (payment). Like cash reconciliation, itspurpose is to catchcash discrepancies, except that it involves matching the cash balance recorded in thebusiness’s GL to itsbank statements. Bank reconciliations can catch deposits in transit and unrecorded serviceand transaction fees,such as when a check bounces. Cash reconciliation compares the amount of cash in a registerto transaction receipts.It occurs before sales figures are posted to the GL.

Why Is Cash Reconciliation Important?

Cash reconciliation is one piece of the overall financial managementpuzzle that confirms a business has the amountof cash it thinks it does. Without confirmation, the business could easily overspend, losecash, create inaccuratefinancial statements and incur other negative consequences. Moreover, the reasons behind thediscrepancies would goundiscovered, perpetuating the problem. Here are some reasons why cash reconciliation isimportant:

• Catch fraud: Cash reconciliation catches innocent mistakes, likemiscounted change, but it canalsouncover fraudulentactivities, such as employee or management theft,embezzlement, unauthorized transactions and payment fraud. Without cash reconciliation,incorrect balances canmaketheir way into a company’s GL and financial statements, leading to misinformeddecision-making,misrepresentation to interested parties, such as investors and lenders, and damage tobrand reputation andloyalty.
• Avoid accounting errors: Accounting errors maynot be 100%unavoidable,especially when tasks and processes are handled manually, but they can ladder up to theconsequences describedabove. Cash reconciliation catches cash discrepancies before they make their way to thecompany’s GL andsnowball into more serious accounting errors.
• Forecast more accurately: Financialforecasting is theprocess of predicting future financial performance, based on current and historical dataand external events.Incorrect data can impair a forecast, such as predicting cash flow, as well as thedecisions made using it. Cashreconciliation is one of several ways a business can ensure that its forecast isaccurate.
• Generate accurate tax returns: Taxes are the cost of doing business. Inthe U.S., for example,allbusinesses must submit an annual income return, either directly or through itsowners’, based on theirtotalincome minus deductions. Cash reconciliation verifies that cash sales are properlyaccounted for and recorded,whichin turn ensures the information on the tax return is accurate. It also supplies thenecessary documentation, intheform of sales receipts, should the business be audited.
• Confirm financial statement accuracy: Business executives,shareholders, lenders and otherstakeholders rely on financialstatements to understand acompany’s financialhealth. Every “i” must be dotted and every “t” must be crossed.Cash reconciliation canhelpprevent the production of statements that misrepresent a company’s cash position.

Steps in the Cash Reconciliation Process

Cash reconciliation is typically a five-step process that can be performed manually or beautomated through software.The latter approach frees up staff time by involving personnel only when they are needed toinvestigate and rectifydiscrepancies. Here’s how the cash reconciliation process works.

1. Gather financial documents: For cash reconciliation, the financialdocuments needed are thesalesreceipts.
2. Calculate and compare receipt and register totals: Add up total salesrecorded in salesreceipts andcount the amount of cash in the POS terminal.
3. Identify and investigate discrepancies: Ideally, the totals will match.But it’s notuncommonif they don’t. If that’s the case, you’ll need to double-check themath, review thetransactionsand look for reasons for the discrepancies.
4. Adjust records: Once those reasons are found, the records can beadjusted to reflect anycorrections.
5. Document the reconciliation: Produce a cash reconciliation form thatbreaks down cash balancesandfully outlines reconciliations and adjustments. Transactions that couldn’t bereconciled should be notedaswell.

Cash Reconciliation Best Practices

How can a business ensure that cash reconciliation goes as smoothly and efficiently aspossible? The obvious answeris to turn it over to software that can handle the most tedious and time-consuming aspectsof the process. Here aresome additional best practices.

• Create a standardized process: Establish a repeatable process forrecording, documenting andreconciling discrepancies that arise. This will help streamline the process, minimizeerrors and facilitateemployeetraining.
• Perform cash reconciliation regularly: Maintaining an active cashreconciliation practice—daily, at a minimum — keeps the volume of errors from mounting, as the primaryobjective is to identifydiscrepancies as swiftly as possible.
• Apply segregation of duties: The person working a register should notbe the person whoperformscash reconciliation. This so-called segregation, or separation, of duties is animportant internal control—think checks and balances — that aims to prevent theft and fraud by dividingresponsibilities among two ormore individuals.
• Use an independent auditor: Enlisting the services of a third-party,licensed professional mayyieldmore precise results than handling cash reconciliation internally, though practicallyspeaking, an auditor ismuchmore likely to review data from the POS system on a quarterly or annual basis, as wellas financialstatements.
• Invest in security: A security system that incorporates videosurveillance can catch dishonestemployees in the act of their misdeeds. POS software can also track cashier performanceand uncover trends intransactions that could point to something suspicious.

Cash Reconciliation Example

Consider a simple scenario involving a brick-and-mortar store named Howard’s Hardware.Business is booming, andlike any smart businessperson, Howard wants to close out each day making sure his documentedsales transactions, inthe form of sales receipts, align with his actual cash intake.

On this particular day, Howard opens for business with $250 in the register and closes with$500. He had only onecashier working at the register. Since he isn’t using software, Howard manually addsup the sales receipts toascertain how much he made and in what forms of payment. His cash reconciliation statement,which categorizestransactions, might look like this:

Next, Howard physically counts the amount of cash in the register and compares it to theending balance on thecash-out form. If the numbers match, he’s done for the day. If they don’t— perhaps, at the end ofthe day, there is only $425 in the register — he’ll have to try to track downthe reason. In this case,he realizes that he mistakenly entered the wrong payment type for the $75 transaction,choosing cash when he shouldhave selected check. In other words, check sales should have been $150. He updates hisrecords and heads home.

Automating the Cash Reconciliation Process

Cash reconciliation may not require complex calculations — mainly addition andsubtraction — but handledmanually as a business grows, the process becomes increasingly cumbersome and fallible. Itcan also ultimately delaythe financial close process and affect the accuracy offinancial statements.Like many other financial processes, cash reconciliation is ripe for automation with theright financial oraccounting software, which streamlines workflows, flags concerning activities and minimizesstaff involvement tomainly investigate discrepancies.

Automate Your Cash Reconciliation Process With NetSuite

Automating as many accounting and financial functions as possible can save teams countlesshours of manual work. NetSuite CloudAccounting Software fits that bill by automatingrepetitive tasks, including payment reconciliation, journal entry creation, accounts payableand receivable, and taxcalculations. Its rich reporting functionality helps business owners and executives stay ontop of key performanceindicators that lead to well-informed decisions based on accurate, real-time data and clearvisibility of cash flow.The solution also ensures regulatory compliance.

Used routinely, cash reconciliation ensures that sales receipts and cash on hand match. Thefive-step process can beperformed manually or be handled by tailor-made software, but either way, it offers manyadvantages, from detectingfraud and accounting errors to simplifying financial forecasting and generating accurate taxand financialstatements. By adhering to best practices and, when possible, automating repetitive taskswith software, regularcash reconciliation can keep costly discrepancies at bay.

Cash Reconciliation FAQs

What are the steps of cash reconciliation?

Cash reconciliation can be broken down into five individual steps: Gather financial documents(sales receipts),calculate and compare balances, identify and investigate discrepancies, adjust records anddocument reconciliation.

What is a cash reconciliation sheet?

A cash reconciliation sheet is a document that compares the cash balance in a register orpoint-of-sale terminal tosales receipts, performed at the close of a shift or the end of the business day.

How do you prepare a cash reconciliation statement?

Cash reconciliation begins by gathering all of the sales receipts for the day or shift. Addtogether the separatereceipt totals to determine the total amount of sales made that day. Then count the cash inthe register and compareit to the sales receipt total. If the totals don’t match, you’ll need toinvestigate the discrepancy.Once identified, records can be adjusted to reflect one or more reconciliations. Last butnot least, everythingneeds to be documented, including unreconciled transactions.

Who is responsible for cash reconciliation?

Responsibility for cash reconciliations depends on the size of the business. In small ormidsize businesses, the jobmight fall to the business owner or a specific manager, while at a large organizationsomeone from the finance oraccounting team will be in charge.

What are the different types of cash reconciliation?

Cash reconciliation is a type of account reconciliation. Other types include bankreconciliation, credit cardreconciliation and digital wallet reconciliation. All types share the same goal: ensuringfinancial accuracy.