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.