How Bank Reconciliation Works and Why It Is Important

Reconciliation of your business bank account implies that you are comparing your internal financial records against the records supplied to you by your bank.

A monthly bank reconciliation enables you to identify any suspicious transactions that could potentially be fraud or accounting errors, and the practice also helps you identify inefficiencies.

Bank Reconciliation – Mode of Operation

To reconcile your bank accounts, compare your internal record of transactions as-well-as balances to your monthly bank statement.

Corroborate every transaction meticulously, ensuring that the amounts match perfectly, and spot any differences that need further investigation.

You also need to make sure that your bank statements display ending account balance that complies with your internal records. If the amounts mismatch, you are liable to receive an explanation for the glitch.

The role of bank reconciliation process demands the following –

1. Every check amount on your bank statement needs to be compared to the check amounts in the company’s general ledger cash account. Any suspicious transactions, like the company’s outstanding checks or errors, would become part of the adjustments listed on the bank reconciliation
2. Every deposit on the bank statement needs to be compared to the receipts registered in the company’s cash account. Any differences, like a deposit in transit and/or errors, shall become part of the adjustments mentioned on the bank reconciliation
3. Other items on the bank statement need to be compared to the various other items in the company’s cash account. Any glitches, such as bank fees, checks returned due to insufficient funds, collections made by the bank and others become part of the adjustments mentioned on the bank reconciliation.

The entire model of operation can be as formal or informal as you’d prefer. Some businesses produce a bank reconciliation statement to document their regular reconciliation of accounts.

If you cannot complete the process monthly, you can choose to perform it daily, quarterly, or for any other interval as per your convenience.

Sources to Gather Information

Your accounting system must contain all of the internal transaction data you require, else you could choose to keep your records in a check register, which could be electronic or on paper.

Your bank can render online access to your account, enabling you to view and download transactions regularly for a detailed juxtaposition.

Some online accounting programs choose to partially automate the process, but you still are required to supervise the process.

If balancing your check book is something that you’re familiar with, then you’re already familiar with bank reconciliation. It’s primarily performing the same thing for the same reasons.

What if There is a Mismatch?

It’s perfectly normal to witness minor differences that have surfaced due to timing, which might include items that haven’t yet been cleared by the bank, but you should be able to justify those differences with ease.

For instance – You might write a check to a vendor and lower your account balance on internal systems as per your convenience, but your bank continues to display a higher balance until the check is deducted from your account.

Such checks are termed as outstanding checks.

An automatic electronic payment could clear your account a day prior or after the end of the month, and you could have anticipated seeing that change in a different month.

When you can conveniently account for discrepancies, there exists no reason to worry. If it takes greater time to identify and reconcile discrepancies, there might be bigger issues that need to be addressed.

The Significance of Reconciling

A regular review of your accounts can help you identify problems way before they slip out of control.

Business bank accounts are entitled to less protection than consumer accounts under federal law, making it is especially vital for businesses to eliminate problems quickly.

You can’t always count on the bank to cover fraud or errors happening in your account.

Catch Fraud in Time

Being wary of initial signs of fraud must be your priority while reconciling transactions in your bank account.

There are a few things that you need to consider namely –

• Could the legitimate checks issued by you have been duplicated or changed, which resulted in more funds being withdrawn from your checking account?
• Were any checks issued without an authorization?
• Were there any unauthorized transfers out of the account, or did someone make unauthorized cash withdrawals?
• Does your account have any missing deposits?

Eliminate Administrative Problems

Reconciling your account can help you spot internal administrative issues that need proper addressing.

For instance, you might need to recalculate how you deal with cash flow and accounts receivable, or maybe change the record-keeping system or the accounting processes used by you.

Proper processes to manage your banking transactions result in outcomes such as:

• Keeping track of the total cash that you have available in your accounts
• Steering clear of bounced checks or incompetency to make electronic payments to partners or suppliers
• Avoiding bank fees paid for insufficient funds or using huge credit when you don’t require it
• Inquiring if customer payments have failed or bounced, and realizing if any action is required
• Tracking all your outstanding checks and keeping up with payees
• Ensuring each transaction gets registered into your accounting system

Identifying any Bank Errors

To understand how to effectively manage your bank accounts as your business expands, consider speaking with the treasury management department at your bank or credit union.

Identifying the Best Time to Reconcile

It’s advisable to review your bank accounts at least once a month.

For high-volume businesses or scenarios with a higher risk of fraud, it would be best to reconcile your bank transactions more often than just monthly. Some companies reconcile their bank accounts every day.

You can also add protection into your bank accounts, and your bank can input some useful ideas.

For instance, many banks offer a solution termed as Positive Pay, which prevents your bank from validating payments out of your account until you provide instructions to warrant individual payments in advance.

Final Words

Bank reconciliation is paramount as it keeps your accounts safe and helps you check for any suspicious activities that might otherwise go unnoticed.

Your bank can provide you with various security options to choose from to safeguard your account from fraud and errors.

A bank reconciliation process can also help you keep updated with the latest transactions and any outstanding amount that needs to be paid to customers or towards credit bills. In case a mishappening or fraud occurs with your bank account because you did not reconcile your accounts timely, you cannot necessarily approach the bank to claim your lost funds.

Thus, it is advisable to keep errors and fraud at bay by reconciling your accounts after specified intervals.

About

OHI is a specialized finance and accounting outsourcing service provider with over fifteen years of finance and accounting outsourcing experience. We have strong functional outsourcing expertise in end to end accounting processes covering daily accounting activities, reconciliations, month end and year-end account finalization processes, employee reimbursements, payroll processing, management reporting and financial analysis.

OHI serves close to 300+ clients across USA, UK and Canada. We invite you to experience finance and accounting outsourcing through us.