Reconciliation for Your Medical Practices
In this blog, we will discuss how to reconcile effectively for your medical practice. This blog was possible thanks to our partnership with Nitra.
Reconciliation for your medical practice is one of the most important financial tasks you will do. Reconciliation may come across as daunting upon the first review, but once an individual has had the opportunity to practice this process a couple of times it becomes almost second nature to them. The process of reconciling your books has a laundry list of benefits, but first, let’s break down a little further what reconciliation is and how it can have a positive impact on your business.
According to Investopedia, reconciliation is “an accounting process that compares two sets of records to check that figures are correct and in agreement.” Simple enough, right? By reconciling your finances every month, you gain a snapshot of the net income of your practice. But within that simplicity comes a myriad of financial protections just by establishing a consistent reconciliation process, protections that could save your practice a lot of money down the road.
Benefits of reconciliation for your medical practice
Huge lump sums disappearing from your bank account are usually quite noticeable and can quickly raise the alarm, but would you be as likely to notice if only five dollars went missing? What if five dollars went missing from your account every day? How long would it take for you to notice?
What I am describing is commonplace small-time fraud that could easily occur within a small business. Now you may think that this is less likely to occur in medical practices. There’s no cash register for someone to pull a few dollars out of, so how could an employee be stealing from me? What if instead of money disappearing, it was something else? Like a box of surgical masks or disposable gloves or even more expensive pieces of equipment?
Reconciliation gives the opportunity to align debits and credits to catch discrepancies like these, giving a business owner the opportunity to track down where they might be coming from and who is responsible. Without reconciliation, it is likely that small theft or fraud will go unnoticed for quite some time, not only making it more difficult to track down where the fraud is occurring but also to get that lost capital back.
While banks have come a long way in the process of real-time transaction data, they still aren’t perfect. Payments can sometimes take multiple days depending on the size and time of the initial requests. Not to mention if you’re using checks for vendor payments then you are relying on those individuals to make timely deposits for an accurate financial snapshot. These timing discrepancies can cause delays in accurate documentation of your financial status, which can have much larger implications than being an irritant.
Let’s say you have a critical piece of equipment breakdown at your practice. You get a quote on the cost to fix the problem and there is enough money in your bank account to do so. Payment to the vendor goes through when shortly after, a separate vendor decides to cash a check you provided them for previous services a week ago. All of a sudden,you go from having enough in the bank to having your account overdrawn, placing you into debt with the bank and having to pay an overdraft fee.
Reconciliation can help prevent situations like these from occurring, as reconciled accounts give you an overview of the capital you have that is actually accessible as opposed to snapshots of capital that have yet to be paid out to the appropriate vendor.
Nobody is perfect, and sometimes that includes the people you bank with. A quick google search reveals story after story of incorrect deposits or withdrawals by banks due to either human error or glitches in their system. These mistakes could cost your practice money or legal trouble if a bank thinks you were withholding error information for your own personal benefit. Reconciliation again helps catch mistakes before they get lost in a sea of transactions by confirming the accuracy of your balance sheet. Leaving a squeaky clean transaction trail to protect your practice as well as yourself.
How do you reconcile your books?
For US-based companies, following GAAP (Generally Accepted Accounting Principles) guidelines is recommended for reconciling your business, meaning that Double Entry Accounting is the best approach. Double Entry accounting is when every single transaction has a listed credit and debit to match the said transaction. This means that by the end of a balance sheet, all the credits should equal all the debits, leaving errors easy to detect as all we need to see is that the sums of these parts are not adding up.
If anything is taken away from this article, it should be that the sum of all credits always equals the sum of all debits. This is an important rule within the world of accounting and is essential to have engrained in your memory.
Let’s look at an example:
Let’s say a client comes into your practice and is in need of x-rays for a broken foot. Once the procedure is complete and the invoice has been created for $1000, the next step is to add the procedure to your balance sheet. Instead of just adding a line of revenue of $1000 to your sales account, you will add a line of revenue for the listed cost on that account and in tandem add a line to your accounts receivable. This balances the accounts.
But what are accounts receivable? And how do they play a role in double-entry accounting?
Accounts receivable and accounts payable
In order to successfully complete reconciling your balance sheet through double-entry accounting, the use of both accounts receivable and accounts payable is necessary. So what are AR and AP and how is it involved in this process?
Accounts Receivable represents amounts owed to a business by its customers for services they have rendered or goods they have supplied in advance of receiving cash consideration. This is done via issuing an invoice to customers, which details exactly what it is they owe for, how much they owe, and when they should pay by.
Accounts Payable represents amounts owed by a business to its suppliers/vendors for services rendered or goods supplied in advance of receiving cash consideration. For accounts payable, we receive a purchase invoice from our supplier, which details exactly what it is they owe them for, how much they owe, and when they should pay by.
Accounts receivable are classified as debits, while accounts payable are classified as credits. To remember this without confusion, there is a very simple phase you can remember: receivers are debited and providers are credited.
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 and could lead to errors in the reconciliation process. Leading us to the final topic of this blog.
What should be included in reconciliation?
There are three categories for the proper recording of business transactions:
Capital – The cash or liquid assets accessible to a business in order to fund the continued day-to-day operations of the business. Capital can be further classified into working, debt, and equity.
Assets – Resources available to the business that provide economic value in the present or future. An asset can be used to generate cash flow or reduce expenses. Assets can be further classified into fixed, financial, and intangible.
Liabilities – Debts a business has to others that could take the form of products, services, or cash. These could include loans, property rental or mortgage, taxes, etc.
So the question of what should be included in reconciliation is actually a misleading one. It’s not about what should be included, but how it should be categorized. All financial transactions that occur in your business fall into one of these three 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 at the end of your reconciliation process, the formula above proves to be incorrect, 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 again. It is recommended to source a professional to assist you with the accuracy of your balance sheet, and it will likely be cheaper for a bookkeeper to spot an error on a previously existing balance sheet than having them create and update a backlogged business’s uncategorized transactions. So regardless of whether or not you do this on your own or decide to hire a third party to complete this, make sure your books are never behind.
Practice makes perfect
As said earlier in this blog, the concept of reconciliation and the process in which it is implemented can be confusing to the accounting uninitiated. It’s recommended that you invest in resources that give you the opportunity to practice this process before doing it with your own business, as it’s normal to experience errors when first starting out. In the end, experience with this process is only going to make you a stronger practice owner, with versatility to both run the business’s operations and finances.
Still confused about reconciliation for medical practices? Reach out to MBSATA and we can answer any questions you may have.