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Bank reconciliation is a process of comparing your company's bank account records with your internal financial records. It ensures transactions are recorded accurately and identifies discrepancies between bank and book balances.
Bank reconciliation is an internal financial control, often done monthly to detect fraud and errors.
Why is Bank Reconciliation Important?
Bank reconciliation is a crucial accounting practice, helping businesses maintain financial integrity, catch errors early, and prevent fraud. Here's why bank reconciliation is important:
- Accurate Financial Record: Bank reconciliation helps you verify if your financial statements are 100% accurate and current. Your business records its transactions and compares them with the bank statement; then, you note down the differences, signs of fraudulent activities, or mistakes done by the bank.
- Fraud Detection: If you catch unauthorized debit card charges promptly, you can dispute possible fraudulent transactions.
- Audit Readiness: In addition, proper reconciliation maintains the integrity of financial statements used for taxes, financing, or compliance reporting. Auditors inspect reconciliation paperwork when reviewing company books.
- Fraud Prevention: It also lets you catch unauthorized payments through staff embezzlement or theft. This is essential for small businesses with few layers of oversight. This way, you can prevent fraud.
Regular bank reconciliation also provides valuable insights into cash flow, allowing finance teams to make informed decisions and improve liquidity management. By ensuring the accuracy of financial data, companies can better manage their accounts and comply with the accounting standards.
What are the Key Steps in Bank Reconciliation?
Bank reconciliation is carried out by a company’s accounting or finance team. In smaller companies, this task often falls to a bookkeeper, while in larger organizations, accountants, financial analysts, or controllers handle the process. Additionally, a finance manager or CFO may oversee the reconciliation to ensure the accuracy of financial records and adherence to compliance standards. Here are some of the steps to follow during the reconciliation process:
- Gathering Records: Start by collecting all relevant financial documents, including bank statements and the company's ledger or accounting software data.
- Comparing Transactions: Match the transactions recorded in the company's ledger with those on the bank statement. Look for any discrepancies such as deposits or withdrawals that appear in one record but not the other.
- Identifying Discrepancies: Investigate any unmatched transactions. These might include outstanding checks, bank fees, or unrecorded direct debits that have not yet been processed.
- Adjusting Entries: Make any necessary corrections or adjustments in the company’s records. For example, bank fees or interest payments should be added to the ledger to align it with the bank statement.
- Reconcile the Balance: After adjusting for discrepancies, the final balance in the company’s ledger should match the bank statement. If they do not match, further investigation is required to identify and correct the issues.
- Final Review: Once both balances are aligned, the reconciliation is complete. This final step should involve a review of all adjustments made, ensuring they are properly documented for audit purposes.
What are the Types of Bank Reconciliation?
Periodic Reconciliation
The most common type of bank reconciliation is periodic, typically performed monthly. This involves comparing your internal company records listing cash transactions to the bank statement entries over the same period. For example, you would compare your August checking account register or software data to your bank's August statement. You would match deposits, checks written, debit card swipes, fees, and other transactions on both.
Continuous Reconciliation
Your accounting software connects to bank data feeds. Transactions import and match automatically in real-time rather than waiting for statement issuance. As items are posted to the account, valid charges reconcile instantly while discrepancies trigger alerts. Merging online banking access allows constant data feeds. As customers pay invoices, software updates balances owed. You will get a clear status update when checks are cleared from your register. This automation provides immediate visibility rather than waiting for month-end.
Inter-Company Reconciliation
For businesses with multiple connected entities, inter-company reconciliation works best. As money moves between affiliated businesses internally, both ledgers must match entries. This confirms no funds get lost or unaccounted for properly in consolidated financial reports. An example is your business reconciling shared expenses charged through an internal centralized expense account. And this is across entities with common ownership.
What are the Benefits of the Bank Reconciliation?
You’ll have an accurate picture of your real cash balances rather than assumptions. This helps with cash flow decisions like whether you can afford that new equipment purchase this month. For example, you thought you had $5,000 in the bank but holding outstanding checks brings it down to $3,000 instead.
Catching mistakes prevents surprise overdraft fees or bounced checks which average $30 per incident. Say you record a customer deposit twice by accident making your register balance higher. Reconciling would catch this duplicate entry quickly. Reconciliation brings order so you understand true cash balances to run your business smoothly.
How to do an Efficient Bank Reconciliation?
Here's how you can make do your bank reconciliation more precisely:
- Review statements promptly when received, don't let paperwork pile up. So set calendar alerts for the end of the month.
- Match every withdrawal and deposit to your registered ledger entries by date and amount.
- Note uncleared checks to account for those still reducing your true balance although not showing on the bank report yet.
- Determine the adjusted register balance after including outstanding checks and unrecorded items for accurate comparison.
- Research to explain any differences between your adjusted balance and statement ending balance.
- Consider automation through accounting software that links to bank transaction feeds.
- Use past reconciliation issues to improve internal processes and prevent future mistakes, such as signing checks prematurely or forgetting to record automatic drafts.
Bank reconciliation truly matters for any business owner who values sticking to the budget facts and minimizing financial hiccups. Comparing your real-time register transactions against monthly bank statements sheds light on true available balances and pending activity. It gives small businesses financial confidence, cash flow control, and fraud protection.
Bluecopa offers full-stack reconciliation automation for businesses to achieve faster and error-free bank reconciliation.
FAQs
1. What do you mean by bank reconciliation?
Bank reconciliation is the process of matching your internal register records to the bank statement activity.
2. What is the journal entry for bank reconciliation?
The standard journal entries include unrecorded fees or interest from the bank side and outstanding deposits not yet cleared. It also shows reconciling checks showing as outstanding on your books but cleared by month-end bank statements.
3. How to reconcile a bank account?
Reconciling starts with cross-checking your recorded transactions in your ledger to the lines item by item on the bank statement for alignment. You can note all variances in dated deposits, withdrawals, and cleared checks.
4. How is BRS prepared?
The bank reconciliation statement (BRS) sums up your book balance across open activity not yet in the bank data. It compares the final adjusted register amount after factoring those pending transactions to the actual final statement tally.
