What is Reconciliation & Why is it Important

Duration: 5-6 minutes

Definition

Reconciliation, in simpler terms, consists of the step wherein one does the checking of the salary documents and it''s further comparison to the salary of the employees paid. It is conducted mostly by the payroll department of the start-ups and SMEs.

Correct and timely employee salaries are perhaps the biggest responsibility that any business holds. Easier said than done, especially for a medium-sized business or a startup.

Shall we now dive into what otherwise a perplexing world of payroll reconciliation might look like?

The Payroll Reconciliation process is the process whereby one is assuring that the current payroll amount agrees with the amounts in the payroll ledger. It is the final step leading up to validation of your processed amounts. All these financial elements, which will include gross pay, taxes, withholdings, and net pay, will have been posted in the ledger. You must confirm and compare these amounts to the payroll math you have been doing.

Why is Payroll Reconciliation Important?

The way you or your employees handle your payroll reflects a lot about your business''s ability to manage finances. If your business has a chaotic payroll process, which can be construed as a reflection of poor financial management, negative conclusions will be made by people like workers, job applicants, clients, vendors, shareholders, and banks, and it will ruin your name.

Also note that the implementation of a reliable, regular pay schedule minimizes the risk of employee morale being eroded due to late payment.

Payroll reconciliation is of immense benefit to your organization should an audit occur. With it, you are at all times assured of having current records of all your payroll transactions right at your fingertips, making it extremely easy for you to meet regulations and file taxes.

How is Payroll Reconciliation Done?

Following is a step-by-step process to ensure effective payroll reconciliation:

Payroll Register Cross Check

The payroll register helps organizations to maintain a more accurate record of each payroll transaction.

It generally includes information like employee work hours, when they would be paid, total net pay, total gross pay, and total deductions i.e. taxes for the period of every single pay cycle.

Therefore, it would be better to give a full verification by ensuring that everything written there is current and right.

Re-verify this information in future as well, as the wages increase for your employees, or if a new employee is to be added in your company.

Verify Work Hours of Employees

Your payroll costs would be largely allocated to the hours your staff put in. You could cross-verify this with the attendance saved in the time sheets of your employees.

Consider such items as vacation pay, sick pay, overtime and other features that are handy, as well. If you are using a time and attendance system that operates with cloud technology, it will be infinitely easier to have your attendance information at your fingertips.

Otherwise, enter it for yourself from what information you uncover in the time cards or have from the same.

Check Payroll

Since there have been a number of raises in this last fiscal period, it would be helpful to go through employee remuneration with a fine-tooth comb.

Use the correct hourly wage base on your company''s requisites to make sure that all employees'' gross pay calculates correctly.

Your salaried employees have a fixed gross compensation each month, irrespective of the hours worked. Make sure these numbers jibe before you proceed to deductions.

Compensation Deductions & Tax Liabilities

Deductions and withholding often change as the turn of the year sees benefit renewals and new tax laws. Work closely with financial teams to stay alert to potential changes at the local and national levels. You will need to verify federal and state taxes, social security, insurance, and more, depending on the country and location where you are doing business.

Document the Data in Your Ledger

The general ledger contains a detailed record with a complete listing of all of the firm''s expenditures, income, liabilities and assets including every financial transaction that the business enters into. In the supporting record, the total salaries given to employees is written in the column for debits and the gross amount of income tax, as well as other deductions are written in the credit column at this point of time in the ledger.

There you go!

Although payroll reconciliation is an additional step in the payroll process, it is well worth the time to ensure you have an accurate system that keeps your employees happy and your company line compliant.