If you own a company, you’ve probably heard the word “bank reconciliation” at some point. And if you do not have a thorough understanding of financial terminology, it is natural to ask, “What is a Bank Reconciliation?” There is no need to be concerned because we will go over this subject in great depth here. You will also gain a thorough understanding of bank reconciliation, its intent, and the steps involved in the process.
What Is Bank Reconciliation?
A bank reconciliation statement is a paper that measures a company’s cash flow on the balance sheet to the total on a bank statement—reconciling the two accounts aids in determining what accounting adjustments are needed. Bank reconciliations are performed on a routine basis to ensure that the company’s cash accounts are accurate. They also aid in the detection of fraud and cash abuse.
Sometimes, When banks send a bank statement to a corporation that includes the company’s starting cash balance, transactions throughout the time, and ending cash balance, the bank’s ending cash balance and the company’s ending cash balance almost always vary.
What Is The Purpose Of Bank Reconciliation?
A bank reconciliation statement is used to verify the authenticity of an organization’s bank account record by matching it to the bank’s record of the account. There is always a time lag between transactions happening (and hence being reported in the cash book) and handled by the bank. The time disparity is normally the source of any discrepancy here between balances. However, certain purchases can go unnoticed by the organization before they collect a bank statement.
These involve loan fines, fees, and dishonored cheques (when the drawer’s bank refuses to honor the cheque drawn on it) and can even entail direct debits and standing instructions whether the account holder has not been notified directly about their payment.
Why Is There A Difference Between The Bank Statement And Company Accounts?
The factors mentioned below can contribute to the difference in the bank statement and company accounts:
- Outstanding checks
- Deposits in transit
- Bank service charges and checks printing charges
- Errors on company’s books
- Electronic charges and deposits appear on the bank statement but are not yet recorded in the company’s records.
What To Do When The Bank Statement And The Company Accounts Don’t Match?
You can write a check to a supplier, which reduces your bill payments on internal platforms, but your bank displays a higher balance before the check clears. These checks are referred to as pending checks.
An automated electronic payment could clear your account a day before or after the end of the month when you intended it to appear in a different month.
There is probably no reason to be concerned because inconsistencies can be readily explained. When it takes longer to identify and reconcile contradictions, it may indicate bigger problems that need to be resolved.
What Is The Bank Reconciliation Process?
While bank reconciling, you are assumed to be creating it via accounting software, making the whole process a lot simpler.
This is where the bank reconciliation tech module comes in. A record of unpaid checks and deposits will be shown.
- Tick all checks reported on the bank statement as attempting to clear the bank in the bank reconciliation section.
- Tick all deposits reported on the bank statement as attempting to clear the bank in the bank reconciliation module.
- Enter all bank costs that appear on the bank statement but have not yet been reported in the company’s reports as expenditures.
- Fill up the final balance in the bank statement; if you find the book balance matching with the bank, then post the modifications made in the bank reconciliation and shut the module. However, if your balances are not equal, carry on with your bank reconciliation review for extra items such as mentioned below:
- Checks reported in the bank’s reports at a different proportion to what is recorded in the company’s records.
- Deposits contained in the bank’s accounts vary from those documented in the company’s records.
- Checks registered with bank’s records but not recorded therein company’s records.
- Deposits are registered in the bank but not recorded whatsoever in the company’s accounts.
- Incoming cash deposits that have a lifting fee deducted.
When Should You Do Account Reconciliation In Modern Accounting?
Account reconciliations are usually performed after the period-end close or weekly, quarterly, or even yearly, in conventional, spreadsheet-driven systems. This is well after the rest of the deals have occurred, the industry has gone on, and the front office is still looking ahead.
Organizations that use advanced accounting solutions will potentially reconcile transactions in real-time.
Companies will also see reconciliation as a constructive mechanism that can prevent mistakes, rather than an after-the-fact, detective operation that checks for errors by introducing a reconciliation approach.
By performing the reconciliation phase early in the month, as business occurs, accounting becomes more tightly associated with the business by supplying key clients with relevant account information in almost real-time.
Significance Of Bank Reconciliation
- By comparing it to the bank account statement, you will ensure no missed entries in the entity’s internal accounting scheme.
- A guarantee that all transactions are accurately registered in terms of names, amounts, and dates.
- A guarantee that no transaction was registered more than once.
- An assurance that there will be no infringement cases, saving the entity from further court prosecution.
- A guarantee that all other issues found are addressed in advance, such as any bank failures, any extra fees paid that you are not aware of, or any other issues.
- This ensures that deception will be discovered as soon as it occurs, the team will take disciplinary measures, and those considering committing fraud can reconsider.
- It prevents administrative error.
A significant additional advantage that individuals gain from the bank reconciliation process is understanding the bank’s costs, fines, and penalties. Overdrafts, overseas transfers, account balances under a certain amount, and other related situations result in an additional fee or penalty being levied on the organization. In a bank reconciliation statement, the entity will learn about certain penalties and costs and improve internal procedures to save money.
Through this article’s medium, we hope we could briefly elaborate on Bank Reconciliation. In this article, we cover bank reconciliation, the purpose of bank reconciliation, why there is a difference in bank statements and company accounts? What should you do if the bank statement and the company accounts don’t match? When you should do account reconciliation in modern accounting, the process of bank reconciliation and why bank reconciliation is necessary. Each point is explained simply and straightforwardly.