Why is it important to reconcile your bank account?
Reconciliation is a critical accounting process that ensures the accuracy of the financial close process. It ensures that the money credited or debited to your bank account matches the money spent or made.
Reconciling the bank account involves comparing the company’s internal financial records or ledger with the statement received through the bank. Bank agreement is essential as it helps detect fraud early, prevents financial statement errors during manual data entry and provides a clearer picture of the company’s finances.
Basic foods:
- Bank reconciliation is the matching of transactions in your records with the bank statement.
- The bank reconciliation is done to identify the differences between the two records, verify the transaction amounts and make the necessary adjustments.
- In case of discrepancies, the financial controller should be involved in further investigation.
- Bank reconciliation can help ensure accurate company financial reporting when done regularly.
Set up bank reconciliation
Bank Reconciliation is the process of matching each balance in the accounting records with the balance noted on the bank statement. In most cases, the balances listed on both records will differ slightly. There are a number of reasons why these differences occur (discussed later), and the bank reconciliation helps make the necessary adjustments so that the accounts align and achieve accurate financial reporting.
The purpose of the banking agreement is to:
- Identify accounting errors such as double payments, lost checks and other human errors during data entry.
- Prevent fraud by flagging unrecorded transactions and early investigation.
- Identify banking errors such as unauthorized charges and incorrectly recorded transactions.
- Providing transparency in cash flows (inflows and outflows) to improve the overall efficiency of financial management. Knowing your true financial position allows you to make informed decisions.
How often should you reconcile your bank statements?
Bank reconciliation should be done regularly, with frequency depending on transaction volume and business needs. Accounting teams will generally need to reconcile their bank statements at least once a month to deal with discrepancies and errors can prove problematic if adjustments are not made correctly in time.
- Small businesses or individuals they have trading volume at the lower end. They can benefit by reconciling their bank accounts on a monthly basis.
- Big companies they have high transaction volumes and reconciling bank accounts at the end of the month can lead to human mishaps and errors. These businesses can run weekly or daily deals to monitor cash flow and deal closely with anomalies.
After agreeing the bank account, it is wise to regularly check the amounts credited and debited from the account. This will help you detect fraudulent activities and flag discrepancies, if any.
How do you reconcile your bank statement?
Before we take you through the process of how to do the bank reconciliation, there are some basic terms you should know
Pending checks:
These are payments that the company has sent and recorded but have not yet been cleared by the bank. Likewise, checks received from the business but not yet in the account must be adjusted accordingly.
Cash transfer:
Cash may not appear immediately in the bank account when funds are transferred via credit card payments or bank transfers. We need to make the appropriate adjustments here as well.
Bank interest and service charges:
Banks deduct fees for services rendered (usually relatively small), which must be adjusted accordingly for an accurate agreement. Similarly, banks pay interest on bank accounts, which must be covered accordingly.
The bank reconciliation involves matching the money in the bank with the actual cash reflected in the cash register. Today, reconciliation is primarily automated through software to save time and money. However, let’s understand the manual bank reconciliation process once:
Step 1: Gather documents
On the bank side, you need bank statements, outstanding checks, deposits and any outstanding transactions. On the company side, you need the company cash register, which records both incoming and outgoing transactions.
Step 2: Match the deposits
After double-entry accounting, a debit on the bank statement is recorded as a credit on the cash register and vice versa. Match the deposits to the two statements.
Note: Bank and cash balances are generally not expected to match due to pending transactions, such as outstanding checks or deposits in transit. They must be configured as shown in the steps below.
Step 3: Adjust your bank balance
The discrepancy in the two balances must be identified and audited on a transaction-by-transaction basis. Bank statements must be adjusted by adding outstanding deposits (deposit in transit) and subtracting outstanding outgoing checks (outstanding checks). The logic here is:
Bank Balance + Deposits in Transfer – Outstanding Checks = Adjusted Bank Balance
Step 4: Adjust the cash books
Fund balance needs adjustment for bank service charges, accrued interest and bounced checks (NSF Checks). The logic here is:
Cash Balance + Interest – Bank Charges – Bounced Checks = Adjusted Cash Book
Step 5: Compare the balance
After adjustment, the bank balance and cash should match. If they are not equal, there is an error in the reconciliation process. Any unjustified expenses or missing income should be investigated and accounted for during the reconciliation process.
Bank Reconciliation Procedure
Step 1: Gather documents
Bank statements
Company fund
Step 2: Match deposits
Step 3: Adjust your bank balance
Bank Balance + Deposits in Transfer – Outstanding Checks = Adjusted Bank Balance
Step 4: Adjust the cash books
Cash Balance + Interest – Bank Charges – Bounced Checks = Adjusted Cash Book
Step 5: Compare the balance
Consequences of failing to reconcile your bank account
Various issues can arise if the differences between your records do not match.
Inaccurate financial reports:
The accounting team cannot accurately depict the company’s cash position without regular reconciliations. This can lead to poor financial decision-making, incorrect financial statements and errors in the tax filing process.
Poor cash flow management:
Unresolved discrepancies can cause problems for the company’s cash flow. Without this insight, accounting teams may overlook missed payments, outstanding invoices, etc.
Increased risk of fraud:
Let’s say you’re trying to match your bank statement by checking the transactions on your credit card statement against your receipts. You may ignore these transactions if there is no paper receipt because the transaction amounts are low. However, if you are diligent, you can dispute the amounts with the credit card company and find out that the credit card information was exposed and that a criminal is making the charges. In this case, you were able to detect fraud and cancel the credit card because of the reconciliation process.
Costly mistakes:
Overstatements or understatements of income, expenses or assets due to unreconciled accounts can lead to inflated profits, incorrect tax returns and financial penalties.
In summary, neglecting to regularly reconcile bank statements can lead to inaccurate financial records, cash flow problems, increased risk of fraud, reputational damage and costly accounting errors. Performing timely reconciliations is an essential internal control to maintain the integrity of your financial data.
Leverage nanonetworks for reconciliation of bank statements
Keeping track of your regular bank account reconciliation can be difficult but critical for accounting teams worldwide. The practice of balancing bank statements is highly manual and does not scale well when transaction volume and deal frequency increase.
To address this issue, Nanonets has developed an automated reconciliation software solution that helps with adequate and accurate reconciliations and scaling with increased transaction volume.
To learn more about our solution, you can review our Nanonets Automated Reconciliation product offering or schedule a call with our reconciliation specialist today.
Embed nanogrids
Financial statement reconciliation in minutes