Accounting

Automating the Loan Reconciliation Process

The loan reconciliation is an important process for many organizations. It helps a company track the different types of loans on their balance sheet and ensure their financial statements are accurate.

Unfortunately, this process can be monotonous, time-consuming, and error-prone for many companies. But thanks to technology, it’s possible to automate the loan reconciliation process to improve efficiency and accuracy.

In this article, we’ll discuss what the loan reconciliation process entails and how to get started with automation.

What Is Loan Reconciliation?

A crucial step of the financial close is reconciling all balance sheet accounts, including loans. A reconciliation verifies the accuracy of the balance sheet by comparing the number on the company’s general ledger to other forms of documentation, such as bank statements, loans statements, amortization schedules, etc.

If the accountant performing the reconciliation finds any discrepancies, they either explain the differences in a reconciliation statement or correct errors that lead to the discrepancy.

A loan reconciliation typically applies to long-term debt and the current portion of short-term debt. The accountant compares the balance in their general ledger to a statement from the lender or amortization schedule and investigates or explains any discrepancies.

The Loan Reconciliation Process

Here’s how to perform a loan reconciliation to verify the loan numbers on your balance sheet.

Step 1: Gather loan records

You need a third-party record showing transactions impacting your loan funds over the period and the month-, quarter-, or year-end loan balance. You might get that from a loan account statement, by logging into your online account, or from a loan amortization schedule.

Step 2: Gather internal records

You’ll also need your general ledger or another record of debits and credits to your loan accounts, loan interest expense, and ending loan balances. This might be in a spreadsheet or your accounting software package.

Step 3: Find your starting balance

Find the last time you reconciled your loan balances. This is where you’ll start your reconciliation.

Step 4: Compare interest expense

Calculate interest expense for the period per the loan statements or amortization schedules and compare it to your interest expense for the period. If you find any discrepancies, you’ll need to investigate the reasons.

Reconciliation discrepancies are usually caused by:

• Duplicate or missing transactions. For example, you posted a payment in your records twice or forgot to post the payment at all.
• Transactions were posted to the wrong account. For example, you recorded a payment made on Loan A to Loan B in your general ledger.
• Accounting errors. When you recorded the payment, you applied the entire amount to the loan’s principal rather than splitting the payment between the loan balance and interest expense.
• Timing differences. For example, you made a loan payment in December the lender didn’t process until January.
• Lender errors. For example, you mailed a payment to the lender, but the lender applied your payment to another customer’s account.

Timing differences should just be noted in your reconciliation summary, as they should naturally resolve themselves. However, errors need to be corrected on your books with a journal entry or the lender’s records.

Step 5: Compare ending balances

Once you’ve corrected any errors found in the interest expense transactions, your ending balance should match the lender’s ending loan balance (minus any timing differences). This will be the starting point for your next reconciliation.

Step 6: Prepare your reconciliation report

Your final reconciliation report should reflect all changes to the loan balances for the month, quarter, or year and explain any timing differences. Your auditors will likely request a copy of this detail report when they perform your year-end financial statement audit.

Types of Reconciliations

Loan reconciliations are just one type of account reconciliation you may need to perform. Others include:

• Bank reconciliations. You verify the bank account balance in your books by comparing it to the ending cash balance from the bank statement.
• Vendor reconciliation. You reconcile the accounts payable balance for a particular vendor to ensure there aren’t any discrepancies or mistakes in the amount the vendor charged or the goods and services you received from the vendor.
• Customer reconciliation. You compare the outstanding customer balance to accounts receivable transactions entered into your general ledger to reveal any errors in a customer’s receivable balance.
• Inter-company reconciliation. A parent company consolidates all of the general ledgers of its subsidiaries to eliminate intercompany transactions for a consolidated financial statement or consolidated tax return.
• Credit card reconciliation. You match credit card receipts and payments to the statement to ensure the amount billed by the credit card issuer is correct.

These are just a few common accounting reconciliation types you might come across. Companies should reconcile the closing balances of all balance sheet accounts to avoid having misstatements in the company’s financial statements. 

Examples of Loan Reconciliation

Here’s an example of a loan reconciliation. You can prepare this by hand or in an Excel spreadsheet. 

How to Automate the Loan Reconciliation Process

Automating the monthly reconciliation process involves leveraging technology or software to replace the manual task of a company’s loan statements with its financial records. This takes care of a cumbersome and repetitive process so your team can focus on other aspects of the monthly close.

Here’s what to look for in your reconciliation solution.

• Cloud-based. A cloud-based platform can seamlessly connect with your cloud accounting software and lender to extract data and match transactions across multiple platforms.
• Rules-based procedures. With a defined workflow and rules-based procedures, your technology can handle most of the workload without any human intervention. Only errors and exceptions need a human touch, saving your team a lot of time.

Benefits of Automated Loan Reconciliation

Automating your loan reconciliation process can drastically improve productivity and reduce your time to close. Let’s look at some of the benefits of automated loan reconciliation.

• Saves time. With automated reconciliations, the process is done quickly. Your team only needs to deal with errors and exceptions, so they can get more done in less time.
• Reduces errors. Manual reconciliations are prone to human error. Technology doesn’t make the kinds of mistakes humans make, so you can rest assured that your reconciliations are accurate.
• Fraud reduction. In a small accounting team, segregate duties can be tough, which leaves your organization exposed to potential fraud. Plus, some companies put off reconciliations because they simply don’t have time. Automated loan reconciliation allows you to reconcile accounts on a monthly basis. It can also pick up on irregularities and allow team members to investigate them right away before fraud has a chance to damage the company. 
• Improved employee morale. Few employees look forward to tedious and repetitive tasks, which is exactly what manual reconciliations entail. Automating this low-level work allows employees to focus on higher-level, more rewarding work, which can improve morale.

Investing in modern technology costs money, and it takes time to implement new systems, update processes, and train employees. But don’t let that investment dissuade you from modernizing your reconciliation processes.

There’s no need to keep performing loan reconciliations manually when technology can save you time and improve quality and consistency in your close. Automating your accounting processes and financial close will pay benefits for years to come. 

Stefan van Duyvendijk

Stefan van Duyvendijk is the Accounting Operations Evangelist at FloQast. Previously, Stefan served as the Corporate Controller for Kodiak Cakes, a private equity owned, leading consumer packaged food company, and as a Controller for Skullcandy, a multinational headphone CPG. These positions followed his five years at KPMG. His experience includes ASC 606 implementation, reduction of financial close timelines, accounting operational improvements, business combinations, financial statement audits, SOX audits and implementation, management reporting, debt, treasury, and systems integrations/implementation.