Importance of Bank Reconciliation
Importance of Bank Reconciliation
Understanding Bank Reconciliation
Bank reconciliation:
- Process of matching business records to a bank statement to ensure financial accuracy.
- Usually performed at regular intervals (monthly or quarterly) to avoid discrepancies.
- Helps to identify errors, fraud, and unauthorised transactions.
Purpose of reconciliation:
- Confirms business’s actual cash balance, matching business records to bank statements.
- Assists in financial decision-making by providing accurate cash flow information.
- Enhances record-keeping accuracy, vital when preparing financial statement.
Steps of Bank Reconciliation
Obtaining records:
- Gather the most recent bank statement and your company’s cash account ledger.
- Ensure all transactions are reflected in the ledger.
Comparing records:
- Compare individual transactions listed in the bank statement to those in the business’s ledger.
- Check both outputs (payments and transfers) and inputs (deposits and receipts).
- Note any discrepancies for review.
Identifying differences:
- Look for issues such as timing differences (cheque clearance delays), error by the bank or business, and fraudulent activities.
- Investigate unrecorded bank fees, interest earned, direct debits or deposits.
Document adjustments:
- Make necessary amendments to the cash account ledger to reflect accurate balances.
- Create a bank reconciliation statement as proof of the performed procedure.
Consequences of Neglecting Bank Reconciliation
Inaccurate financial positioning:
- Without regular reconciliation, a company might have an inaccurate picture of its financial health.
- This might mislead in making important business decisions.
Risk of fraud or theft:
- Unauthorised or fraudulent transactions may go undetected without regular reconciliation.
- This could result in financial loss and potential legal consequences.
Inaccurate record-keeping:
- Poor reconciliation may lead to record-keeping errors that impact the accuracy and reliability of financial statements.
- This might result in penalties or fines for non-compliance with financial reporting requirements.
Damage stakeholder confidence:
- Inaccurate records due to poor reconciliation can lead to loss of confidence from stakeholders
- Creditors, shareholders, and other stakeholders rely on accurate financial information to make decisions.