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.