What is banking reconciliation?
A bank reconciliation statement is a document that compares the cash balance on a company's balance sheet with the corresponding amount on its bank statement. By reconciling the two accounts, it is possible to determine whether accounting changes are necessary. Bank reconciliations are performed at regular intervals to ensure the accuracy of the company's cash records. It also makes it possible to detect fraud and any cash manipulation.
The purpose of the bank reconciliation
A bank reconciliation is employed to compare your records with those in your bank to see if there are differences between these two sets of records for your cash transactions. Your version of your cash record's ending balance is called your account balance, while the bank version is called your bank balance. It is extremely common to have differences between the two balances, which you need to track and adjust in your records. If you ignore these differences, there will ultimately be substantial variations in the amount of money you think you have and the amount the bank says it holds in an account. The result can be an overdrawn bank account, bad checks, and overdraft fees. In some cases, the bank may even decide to close your bank account.
It's also helpful to perform a bank reconciliation to see if the customer's checks have been returned or if any of the checks you issued have been changed or even stolen and withdrawn without your knowledge. Therefore, fraud detection is the main reason for bank reconciliation. When a search for fraudulent transactions is in progress, it may be necessary to reconcile a bank account on a daily basis to receive a timely warning of an issue. At the time of the annual audit, auditors will always verify the company's final bank reconciliation as part of its verification procedures, so this is one more reason to perform a reconciliation.
Here are some areas where your records may differ from your bank statements:
Fee: The bank charged a fee for its services, such as a monthly fee.
NSF checks: The bank may have rejected some of your deposited checks because the person or company that issued them did not have enough funds in their accounts to send them to your bank. These checks are known as bad checks.
Recording errors: You or the bank may have entered a check or made an incorrect deposit.
Some organizations consider bank reconciliation so important that they do it every day, which is done by accessing the latest bank statement updates on the bank's secure website. This is especially important if a business is operating with minimal cash reserves and needs to ensure that its recorded cash balance is correct. A daily reconciliation may be necessary even if you think someone is fraudulently withdrawing money from your bank account.
The importance of reconciliation
Detects fraud
The bank reconciliation statement helps detect fraudulent transactions. It is advised that you hire an independent accountant to perform the reconciliations to prevent the employee from tampering with your books and reconciliations.
Here are some things to consider:
Are there unauthorized account transfers, or has someone made unauthorized cash withdrawals?
Does the account have any missing deposits?
Were the checks written without authorization?
Were the legitimate checks you issued duplicated or altered, resulting in more money in your checking account?
Prevention of administrative problems
Bank reconciliation also helps you identify internal administrative issues that require special attention.
The right processes to manage your banking transactions results in outcomes such as:
Avoid bank charges for insufficient funds or using lines of credit when not needed
Avoid cashless checks (or make electronic payments) to partners and suppliers
Detect banking errors
Find out how much money you have available in your accounts.
Find out if customer payments have been returned or failed and determine if action is needed.
Keep track of your pending checks and track payees
Make sure all transactions are entered correctly in your accounting system.
The best time to reconcile
It is advised that you reconcile your accounts at least once a month. For high-volume businesses or situations with a higher risk of fraud, it may be necessary to reconcile bank transactions more frequently. Some companies reconcile their bank accounts daily.
You can also build protection into your bank accounts, and your bank can come up with helpful ideas. For example, many banks offer a solution called Positive Payment, which prevents the bank from approving payments from your account unless you provide specific instructions for approving individual payments in advance.
Tips for ensuring effective bank reconciliation statements
First of all, it is vital to have all the necessary documentation and information. This means that you will have a view of things if you have all the necessary documentation and information.
Secondly, avoid common mistakes, such as:
Error with duplicate entries.
Errors when entering commas and periods can lead to discrepancies that can be of significant value.
Not accounting for a transaction that would result in a difference equal to the missed amount
Transposition errors when inserting figures into books.
Thirdly, banks can also make mistakes: your bank may have made a mistake. They may charge incorrect amounts to your account or credit deposits that do not belong to you. Therefore, if you encounter any errors for which you cannot find an explanation or for which you are in doubt, it is best to consult your bank.
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