A fundamental principle in accounting is that everything has to balance. People call it different things, but in accounting, it is called reconciliation. All accounting systems are built on this principle. You cannot unbalance it.
The problem here is that there is always room for human error. We are human and certainly not perfect. Sometimes errors happen.
This is where truth and reconciliation come in. The truth is that you will make mistakes. Never intentional, of course. The reconciliation part is making sure that what is on paper equals what is on the accounting system. This has to be EXACTLY the same.
Focus first on the bank reconciliation
The first, and most important, reconciliation to do is the bank reconciliation (bank recon).
The rule here is, if it did not happen on the bank account, it did not happen.
Importantly, do not enter it into the system if it did go through the bank. The bank recon has to be ZERO. If not, find the difference.
HINT: if you are looking for a number and it is exactly divisible by 9, then you have transposed a number. For example, if you have written 179 instead of 197, the difference equals 18 (2×9).
There are other important recons that need to be done. Most importantly, your customers must have correct and accurate statements so they (and you) know exactly how much they owe you. The same principle applies to your suppliers (people you need to pay). You need to pay them correctly.
Any differences must be identified and corrected as soon as they are spotted, but bear in mind that these may not be mistakes, such as credit notes that were passed.
Whatever you do in accounting – and in life – it has to be in balance.
If it does not balance because not all the information is there, for example, the reporting you pull will be useless because it is incorrect. You then make decisions on incorrect data. This can be catastrophic to your business.
The human factor
The beauty of an accounting system is that you cannot make it unbalanced. It will not let you. If there is a mistake, the human who used the system, made the mistake. Any mistake can be reversed. This can get tricky so if you are unsure call an accountant who knows the system you are using.
There are many ways to describe balance in various fields of study.
In science, it is ‘for every action there is an equal and opposite reaction’.
In accounting, it is ‘for every debit (action) there is a credit (reaction)’.