While business keeps a careful internal record of all its cash transactions in its cash book, a bank does the same from its side in the form of company’s bank statement which is sent out in a regular basis (monthly). Bank Reconciliation is a process of comparing and cross-checking both these statements, identifying the discrepancies and bringing them both on the same page to ensure accurate financial records.
A Bank Reconciliation Statement is a document where those potential changes are noted and the company’s cash balance is matched with the amount shown on the company’s bank statement. Bank reconciliation is a fundamental step in accounting which is performed at regular intervals to make sure the company’s financial records are correct and on-point.
Why the Bank Reconciliation Statement is necessary for a business?
Given cash is the most vulnerable asset for a business, especially small and medium businesses, every penny must be accounted and the accounting must provide the necessary control over the cash and its flow by uncovering potential irregularities in the process. And bank reconciliation is a critical aspect of controlling the internal cash flow by verifying it on a timely basis.
- Reconciliation helps detect the errors, irregularities or potential frauds that cause the mismatching of the record books and bank statements. By throwing the light on the irregularities bank reconciliation helps the entity to set things right by plugging the security gaps that caused them in the first place. Unauthorized transfers or withdrawals, missing or duplicate checks and deposits? Reconciling helps you identify them.
- Bank reconciling can give you a clear picture of the administrative inefficiencies of your cash management that immediately needs your attention. This allows you to evaluate your cash flow, accounts payable or accounts receivable mechanism, record-keeping or any accounting system you employ.
An efficient bank reconciliation procedure helps you know the current accurate cash position in banks, avoids check bounce, bank fees due to insufficient funds, and also helps you keep track of outstanding payments and checks.
But why exactly does an entity need a bank reconciliation, why do cash book and bank statement mismatch? There could be many reasons for the mismatch, but the two most common reasons for the differences in the cash book and bank statement are:
The difference in timings: Mismatch due to timing difference can happen when the same financial entry is recorded at different times, one early and other late in either of the cash book or bank statements. This can happen in multiple instances when:
- The cheque issued was not deposited for payment.
- Paid check not being cleared by the bank.
- Amount deposited directly to the bank account.
- Direct debit/credit by the bank from/to the customer.
Errors in recording transactions: Errors that are made in recording a transaction either from a bank or an entity’s accountant in the cash book can result in the mismatch. In rare occasions, embezzlement and misappropriation of entity’s funds can result in the discrepancies and fortunately, they can be caught early with the help of regular bank reconciliation.
In addition to this, the bank’s service charges, interest payments, NSF checks can also account for the mismatch between the bank statement and cash book.
Six Simple Steps for Perfect Bank Reconciliation:
- Make sure the dates are entered correctly and compare the opening balances of cash book’s bank column and bank statement as the first step. Un-presented or un-credited checks from earlier can cause the is match right away.
- While debit balances in cash book mean assets and credit balances mean a bank overdraft, it is reverse in the bank passbook. So now compare the cash book bank column’s debit side with bank statement’s credit side, vice versa and tick all the transactions that match.
- Bank statement often show a higher ending balance than your ledger owing to the checks and payments that are yet to be processed by the bank. So, compare the checks issued from the check register to the checks paid by the bank. Outstanding checks issued by you but are not yet cleared should be adjusted.
- Now compare the deposits listed in the bank statement with deposits of the ledger. The amount that is not deposited in the bank is the deposit in transit and should be adjusted accordingly
- Check for credit or debit memoranda issued by the bank that is not listed in the ledger. New expenses reflected in the bank statement due to charges levied by the bank i.e. service fees, charges for not sufficient funds, printing fees are common.
- Verify the accounting records for any manual errors if the mismatch continues. Sometimes, the bank can make mistakes like clearing another entity’s check on your bank account. So, verify both ends.
All the above tips are basic steps for bank reconciliation for small businesses and as the business grows the volume of transactions amplify making bank reconciliation becomes a chore that requires loads of time, effort and expertise.
As businesses are slowly getting back on their feet, the majority may fall short of sufficient resources to get the job done especially if they resort to remote accounting and bookkeeping. However, a business can get expert help at affordable price by outsourcing bank reconciliation work to expert remote accounting firms like us at Back Office Accountants. Being one of the best accounting firms in the business, Back Office Accountants has helped hundreds of businesses with all types of accounting and bookkeeping services as per their requirements. If you are a business entity looking to outsource bank reconciliation work, our expert accountants can help you at an affordable price point. More information on our bank reconciliation services here: https://www.backofficeaccountants.com/