February 1, 2023
This story is part of a series on medical accounting written by Nicholas Turturro at MBSATA, the largest independent bookkeeping firm in New York City.
Reconciliation is one of the most important financial tasks you will do for your practice. It may be daunting, but it gets dramatically easier with experience and it comes with a long list of benefits.
According to Investopedia, reconciliation is “an accounting process that compares two sets of records to check that figures are correct and in agreement.” When you ensure that your income, your expenses and your bank balance all align, with all money accounted for, you are reconciling. Simple enough, right?
By reconciling your finances every month, or having a professional do so, you gain a snapshot of your practice’s net income, as well as a bevy of financial protections. By establishing a consistent reconciliation process, those protections could save your practice a great deal of money over time.
As we have written about in the past, most doctors should consider professional accounting. It ensures that your practice is getting expert financial care and that physicians can spend their time practicing medicine. But it does help to understand some basic accounting so you can better shop for services and communicate your needs.
For U.S.-based companies, following Generally Accepted Accounting Principles (GAAP) is recommended for reconciling your business, meaning that double-entry accounting is the best approach. Double-entry accounting takes place when every single transaction has a credit and debit listed. This means that at the end of a balance sheet, all the credits should equal all the debits. That makes errors easy to detect, when the sum of these parts don’t add up.
This bears repeating: if everything is properly reconciled, the sum of all credits always equals the sum of all debits. This is an important rule in the world of accounting. Let’s look at an example.
Let’s say a patient comes in for an office visit. The bill is $460 for the visit and an invoice is created for that amount. The next step is to add that to your balance sheet. Instead of just adding a line of revenue for $460 to your sales account, double-entry accounting would require a line of revenue in your sales account and another line for the same amount in accounts receivable. This balances the two accounts.
In order to successfully complete reconciling your balance sheet through double-entry accounting, the use of both accounts receivable and accounts payable is necessary.
Accounts Receivable represents amounts owed to a business by its customers for services they have rendered or goods they have supplied before payment has been made. This is done via issuing an invoice to customers, which details exactly what services were rendered, how much they owe, and when they should pay. On the books, accounts receivable is its own account, and it contains all unpaid invoices. Accounts receivable are classified as debits.
Accounts Payable represents amounts owed by the business to its vendors for services rendered or goods supplied before bills are paid. For accounts payable, we receive a purchase invoice from our vendor, which details exactly what they did, how much we owe, and when we should pay. On the books, accounts payable is its own account and it contains unpaid bills. Accounts payable are classified as credits.
Accounts receivable and accounts payable are extremely important to reconciling your practice. Without proper documentation in these accounts, it is not possible to maintain double-entry bookkeeping, which could lead to errors in the reconciliation process.
There are three categories for properly recording business transactions:
So one big question in reconciliation is how transactions should be categorized. All financial transactions that occur in your business fall into one of these categories, and each of these transactions has to have its matching opposite. In order for a balance sheet to truly be considered balanced, it must follow the golden accounting equation: Assets = Liabilities + Equity.
If the formula above proves to be incorrect at the end of your reconciliation process, then there is an error in your balance sheet and further review is necessary.
Sometimes errors in balance sheets can be tricky to find, especially after scanning for them over and over. This is where a professional with experience can really help. But regardless of whether you keep your own books or outsource the job, make sure that reconciliation takes place monthly. It will save both money and headaches.
Need help with reconciliation? Nitra products come with receipt matching software and integrate with popular accounting packages like Quickbooks. Need professional advice? MBSATA has helped thousands of companies implement sound and efficient accounting.