Need for Bank Reconciliation

Need for Bank Reconciliation

Understanding Bank Reconciliation

Bank Reconciliation:

• It is a statement that forms a link between the cash balance in an entity’s cash account and the cash balance according to its bank statement.
• It’s prepared on a particular date, such as the end of a month or quarter.

Entries in Bank Reconciliation:

• Could include cheques issued but not yet presented, deposits made but not yet credited, bank charges directly deducted by the bank, etc.
• These are amounts known to the business but not to the bank, and vice versa.

Purpose of Bank Reconciliation

Identify Differences:

• It is critical to regularly reconcile your bank account to ensure that the bank’s records of transactions match your own.
• Discrepancies can arise from errors, fraud, or simply timing differences.

Confirm Accuracy of Records:

• Bank reconciliation enables a company to ensure that its accounts are accurate.
• Organisations can address any discrepancies they identify as a result of the process.

Process of Bank Reconciliation

Collect Bank Statements:

• Obtain bank statements on a regular basis to compare with your books.

Identify Outstanding Items:

• Identify any deposits, withdrawals, and cheques that are recorded by the company but not yet reflected on the bank statement.

Adjust Bank Balance:

• Adjust the bank balance based on the outstanding items.
• This will give you the adjusted bank balance.

Compare Balances:

• Compare the adjusted bank balance with the company’s cash account.
• Any further discrepancies should be investigated and corrected.

Importance of Regular Reconciliation

Detecting Errors or Fraud:

• Regular bank reconciliation allows for the early detection of errors or potential fraud.
• Both bank errors and company errors can be identified and rectified.

Financial Management:

• It’s a good practice for overall financial management and helps in the detection and management of cash flow patterns.

Avoid Financial Complications:

• Regularly reconciled accounts lead to fewer headaches during audits and can prevent financial complications further down the line.