What is cross-entity bank rec?

What is bank reconciliation?

One of the first rules of bookkeeping: reconcile your transactions. Bank reconciliation is the process of checking that the transactions recorded in your accounting system agree with what actually happened in the bank account, and matching each statement line to the bill, invoice or journal it relates to.

With cloud accounting systems, bank reconciliation is fairly straight-forward thanks to the following features:

• Bank feeds, which mean that bank transactions are automatically imported to the accounting system without the need for finance teams to manually enter their bank transactions or import them via CSV.
• Bank rules save users from having to manually create a new transaction each time they get a recurring or similar type of bank statement line in a spend or receive money transaction (where there is no invoice or bill which relates to the transaction).
• Intelligent matching of spend/receive money transactions to the corresponding bill or invoice

When bank rec becomes a challenge

These are among the many benefits of cloud accounting systems. However, bank rec can prove a challenge for finance teams of businesses with multiple related entities. In multi-entity businesses, sometimes one entity will pay a bill or receive income on behalf of other group entities. In this situation, bank reconciliation suddenly becomes much more complicated, as the benefits mentioned above are only ever applied within the same entity. There is also a risk that a bill could be paid twice, as it will still show as outstanding in the entity to which it pertains. There are a few reasons why a business with multiple related entities might operate this way.

For example, Entity X might pay a bill on behalf of Entity Y if Entity Y doesn’t have its own bank account, or perhaps the bill was posted in Entity X’s currency so it makes sense that they would pay it. Whatever the reason, the result is a very difficult reconciliation process for the business’s finance team. To match payments and income to bills and invoices posted to other group entities, finance teams have to comb through all of the related entities’ accounts to find the information they need to reconcile the transactions. It takes a long time and can be incredibly frustrating. Read on to find out how to easily overcome the challenge of reconciling transactions across your group with cross-entity bank rec.

What is cross-entity bank rec?

With cross-entity bank reconciliation, finance teams can quickly and easily match transactions to bills and invoices that have been posted to other group entities. BRAG (which stands for Bank Reconciliation Across the Group) is an extension which adds on to the bank reconciliation page of your accounting system. This enables users to quickly find the bills and invoices which apply to their intra-group transactions, and immediately reconcile them as they would with their regular payments and invoices.

It may well be that Entity X makes a payment which covers several bills posted to Entity Y, or perhaps the payment even covers bills posted to Entity Z as well. Perhaps Entity X only paid part of the bill posted to Entity Y. Cross-entity bank rec will allow for all of these use-cases, letting users easily match transactions to any and all of the bills or invoices to which they relate.

Which accounts should cross-entity payments be posted to?

Matching the payment is only half the job. When one entity settles another’s bill, the payment also creates an intercompany balance: the paying entity is now owed money by the entity whose cost it covered. That needs recording at the same time, or the two entities will reconcile individually while their intercompany accounts quietly drift apart.

Most groups handle this with an intercompany current account per counterparty - one in each entity, mirroring the other - plus a clearing account for cash in transit, where money has left one entity but not yet arrived in the other at period end. Coding cross-entity payments to a P&L account or leaving them in suspense is what turns a simple bank rec into an unexplainable balance three months later.

How cross-entity bank rec speeds up month end close

Bank reconciliation sits early in the month end close, and everything downstream waits on it. If cross-entity items are the ones left unreconciled, the whole close slows to the pace of whoever is searching through other entities’ ledgers for a matching bill.

Reconciling those items in place, from inside the bank rec screen you already use, removes that search entirely. It also removes the double-payment risk, because the bill is settled in the entity that owns it rather than left showing as outstanding. And because the intercompany entry is created as part of the match, the intercompany reconciliation that follows starts from balances that already agree.

To find out more about Mayday's cross-entity bank reconciliation software, see BRAG.

If you’d like to see how BRAG could simplify reconciling payments across your group entities, sign up for a 30 day no-card free trial today or book a demo with one of the team.