Of all the accounting or bookkeeping best practices or tips for a better accounting system, one point that is always stressed is to ensure bank reconciliation. It is an important part of the bookkeeping process for any business entity to track any inefficiencies or unusual transactions. In this article, we make you understand the significance of a bank reconciliation statement. We will focus on answering all the questions related to bank reconciliation so that you understand its implication for your business.
What is a bank reconciliation statement?
A bank reconciliation statement is a statement prepared to reconcile the differences between the bank statement and the bank book.
Why do we need a bank reconciliation process?
The bank reconciliation process ensures that whatever entries you make in your books of accounts; the same is reflected in your bank account statement. There should be no missing entries, duplicates, or wrong entries in terms of name, value, date, or any other. To ensure that all the transactions entered in your company’s books of accounts are legitimate, accurate, and the same as the entries in the bank statement, the bank reconciliation process is carried out.
It is a good practice to reconcile bank statements every month to remain thorough with your business records and balances. This process ensures that all financial transactions of a business entity are accounted for and recorded. If the bank account statement is not the same as the entries in the internal accounting system, entities must investigate the differences and make adjustments, if required.
What are the reasons the balance as per the bank statement and bank book do not tally?
Some of the reasons are listed below:
1. Checks deposited but not yet cleared
2. Checked issued but not yet presented for payment
3. Bank charges
4. Errors in entering transactions
5. Direct deposit into a bank account by a customer
6. Credit entries for bank interest appearing in the bank statement that is not yet accounted
What are the accounts that need reconciliation?
Businesses must reconcile every account for which they have made a register. The accounts that must be reconciled every month include the following:
- Current account
- Credit cards
- Loans, mortgages, lines of credit, etc
What are the benefits that an entity obtains by conducting a bank reconciliation process?
The key benefits of conducting bank reconciliation are as follows:
- An assurance that there are no missing entries in the internal accounting system of the entity by comparing it with the bank account statement
- An assurance that all the transactions are recorded correctly with accuracy in terms of names, numbers, and dates
- A surety that no transaction has been recorded more than once
- A guarantee that there are no fraud cases so that the entity is saved from any legal action later
- A surety that any other issues identified are tackled beforehand, such as any errors by banks, any additional fees charged that you are not aware of, or any other
Another key benefit that entities obtain from the bank reconciliation process is an awareness of the fees, charges, and penalties imposed by the bank. There are certain transactions for which an extra charge or penalty may be imposed on the entity, such as an overdraft, international payments, account balance under a certain amount, and other similar cases. With a bank reconciliation statement, it is easier for the entity to know about such penalty amounts and charges and make changes in the internal processes to save their money.
Therefore, business entities must make it a regular practice to develop a bank reconciliation format and follow all the bank reconciliation steps, either monthly or quarterly, depending on their frequency of transactions.
What happens when the errors are identified?
When business entities compare the entries on the bank statement with the internal accounting system, they may identify some inaccuracies or inefficiencies. They must check and investigate each of these discrepancies and find the root cause of the error. It may just be a manual error of entry in accounting, or there might be a fraud involved in it.
If the inspection of a bank reconciliation statement reveals genuine accounting errors, these are corrected in the books of accounts with relevant adjustments. If such errors continue to happen regularly, then the entity must identify the real reason. It may be because the accounting software needs to change, or the accounting department needs to find more capable and professionally expert people for the job.
If the scrutiny reveals a fraud situation, then the entity must scrutinize it further to identify the real culprit and take legal action, depending on the fraud case and the business policies. If the assessment of the bank reconciliation statement reveals an error from the bank, then the company must notify the bank regarding the same. Post such an event, the entity must keep a regular check on the bank statements to identify any repeating errors. If such errors keep happening from the bank side, it is time for the entity to change its banking partner.
How necessary is bank reconciliation?
Bank reconciliation is one of the key best practices of accounting and for accountants, because it helps in the identification of inaccuracies and discrepancies, which, once corrected, can add value to your business. Therefore, adopt this best practice to give a quick stop to your problems and to improve your internal accounting processes.