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Continuous accounting is the ongoing process of updating a business’s general ledger with reconciled bank statement transactions as soon as they become available.
What are the different ledgers used in continuous accounting?
Broadly speaking, businesses use two types of ledgers to perform continuous accounting: general ledgers and subledgers.
The general ledger is a business’s ultimate source of truth. It contains a record of all the transactions a business incurs and reflects a comprehensive picture of their finances. Subledgers provide more specific information about transactions. Whereas the general ledger contains a business’s every transaction within a specified time period, subledgers hold records of account-level transactions.
Virtually all businesses use software solutions to help manage these ledgers. Known as enterprise resource planning or ERPs, accounting systems like QuickBooks, NetSuite, and Xero provide a digital platform for storing a business’s general ledger and subledgers. These software connect to tools where transactions and the coding of transactions take place such as Brex, Airbase, and Expensify.
One of a business’s most important jobs is to manage and update their ledgers in a process called the “cash close process'' or bank reconciliation. This process entails reconciling subledger transactions with those in a business’s bank statements, coding the transactions to their appropriate account, and reconciling the final balance so it ties back to the bank balance. Continuous accounting increases the speed of cash closing by allowing businesses to perform reconciliation as soon as their bank transactions clear instead of when they receive their monthly bank statement.
How does continuous accounting work?
Continuous accounting software integrate with subledger platforms and bank accounts to automate the process of reconciling and uploading transactions to an ERP. These advanced automation software help facilitate the transfer of information from bank accounts to ERPs, so the process requires less manual input from employees.
For example, let’s say the Commemorative Corp. decides to throw an office party for their one-year anniversary. An employee named Confetti hires a caterer and pays her with a $1,000 ACH credit. Confetti makes the payment through their expense-management software, Invoices-R-Us, tagging it as an “Office Expense” and inputting metadata about its amount, date, and purpose. The Commemorative Corp.’s continuous accounting software, integrated with Invoices-R-Us and their bank account, collects this information about the transaction as Confetti initiates the payment.
A few days later, when the company’s bank processes the ACH credit and posts the transaction, their continuous accounting software can automatically match the $1,000 outgoing payment recorded by the bank with Confetti’s recent $1,000 expense. Using its collected metadata, the continuous accounting software codes the matched records as an “Office Expense.” From there, it pushes the reconciled payment along with enriched data about the transaction to their general ledger housed in their ERP software.
Because continuous accounting software expedites the reconciliation process, businesses can update their cash balances and associated expenses daily, unless their expenses are running through the bank directly. This helps executives make more rapid and accurate decisions because the general ledger reflects a near real-time picture of the company’s finances.
What are the origins of continuous accounting?
Before continuous accounting software, businesses waited until the end of a time period, usually monthly, to perform bank reconciliation. A company had to input every bank statement transaction into their computer system and manually find the match for each among a large spreadsheet of transactions—every month. Many businesses still use a manual process to close cash every month. On top of being a huge drain on time and resources, this process is less practical due to the volume of modern businesses' transactions and complexity of their bank accounts.
What are the benefits of continuous accounting?
All businesses have to file taxes annually. To do this, they need to justify every cent that has moved throughout the year. Continuous accounting increases the efficiency and accuracy of the accounting process, making it easier for businesses to file taxes.
Continuous accounting reduces period-end processing time by allowing businesses to perform financial tasks on a more frequent basis. Rather than waiting for the end of a month, with continuous accounting, financial processes can better reflect the actual, dynamic business cycles. Workloads are also likely to be evenly distributed over time, allowing businesses to better leverage finance teams.
Continuous accounting’s automation of manual tasks allows for continual monitoring for errors, unusual activity, fraud, and more. The more real-time flow of financial data reduces the opportunities for error and time associated with verifying a business’s taxable income. Businesses can enjoy greater clarity and organization when reporting categories like assets and expenses. Though the process still requires oversight, continuous accounting takes some stress off of the business by breaking down the closing process into day-to-day activities and spreading out the reconciliation process.
These are the broader payment concepts that underpin payment operations.
- 1Payment Operations
- 2Banking API
- 3Flow of Funds
- 4Bank Reconciliation
- 5Continuous Accounting
- 6What is Money Transmission?
- 7What is Cash Management?
- 8What is Treasury Management?
- 9What are Incoming Payment Details?
- 10Payment Processor vs. Payments Gateway
- 11What is Cash Forecasting?
- 12What is Cash Pooling?
- 13What is Liquidity Management?
- 14What is Real-Time Gross Settlement (RTGS)?
- 15What is Batch Processing?
- 16What are Payment Controls?
- 17What is Idempotency?
- 18Settlement (Net vs. Gross)
- 19What is Asset Risk Management?
- 20What is A2A Banking?