Why is Bank Reconciliation Statement Important for Businesses?
Bank reconciliations are an important financial management task for both self-employed workers and companies. They are essential for ensuring the accuracy and integrity of a company's financial records. In this blog, we will discuss what a bank reconciliation statement is, how to prepare one for your business, and why it is important.
What is Bank Reconciliation?
Bank reconciliation consists of checking the records of the company’s accounting books with the statements of the current accounts to detect possible differences and make the necessary corrections or adjustments. Through this operation, you verify that the bank account faithfully reflects what happens in your company’s accounts.
The idea is to check each one of the accounting entries carefully. This is why keeping the time from passing between one bank account reconciliation and another is recommended because the more months elapse, the more difficult it will be to balance the accounts.
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The main objective of Bank reconciliation is to keep the accounts and bank movements under control, which should be carried out at the end of the month, comparing the bank statement with the registered operations of expenses and income during that period.
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What is a Bank Reconciliation Statement?
A bank reconciliation statement summarizes banking and business activities, reconciling an entity’s bank account with its financial records. The account statement describes the deposits, withdrawals, and other activities that affect a bank account during a specific period.
A bank reconciliation statement is a useful internal financial control tool to combat fraud. It outlines the deposits, withdrawals, and related activities that affect a bank account in a specified period.
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Example of A Bank Reconciliation Statement
To understand the bank reconciliation statement better, another example can help you.
For example, a company XYZ had an active account with a balance of Rs. 1,00,00,000 on April 15. That month, they wrote three checks for Rs. 1,50,000, Rs. 40,000, and Rs. 384,090. They also deposited Rs. 14,000. As per the reconciliation statement, they have a balance of Rs. 1,22,00,703, but the book balance shows an equilibrium of Rs. 1,23,08,970. After checking the bank reconciliation statement, they found they didn’t record the account’s Rs. 25000 monthly service fee. They also found that the check for Rs. 50,600 was mistakenly cashed instead of Rs. 5000. The company has now identified the missing component on their balance sheet and rectified the errors to balance their statements.
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How To Prepare a Bank Reconciliation Statement?
Follow the below steps to prepare your bank reconciliation statement –
Collate your Data – Start with your closing balance for the prior month; it will be your starting point.
Choose Your Format – Decide which format is the most suitable for your business. If you are downloading any format or template, keep that handy.
Add Your Business Infomation – Feed your data, including your business logo, name, and other information.
Account for Deposits –
- Record the initiation and completion of payments.
- Arrange the encashed cheques chronologically and compare them with the cash disbursement journal.
- List the outstanding cheques and deduct the amount mentioned on such cheques from the balance shown on the bank statement.
Account for Payments – Note down the initiation and completion of payments.
Check for Any Errors – Check your data and the report for discrepancies.
How Does Bank Reconciliation Benefit Your Company?
Greater control of economic resources
The bank reconciliation will allow you to verify the integrity of the accounting information so that you can have an exact image of the economic situation of your company. Keeping your accounts up to date and knowing your balance will help you more efficiently distribute the resources you have to promote sustained and viable growth over time.
Detect accounting errors
Bank reconciliation avoids unpleasant surprises in accounting. It will allow you to detect errors in the entries of the accounting books, checks drawn that have not been cashed, consignments registered in the books that the bank has not yet paid, or, on the contrary, debit or credit notes that the bank has charged or paid, but which you have not yet recorded in your books.
Check payments and receipts
If you have a considerable volume of business, bank reconciliation will become the best tool to verify your SME’s transactions. You will be able to be clear about which suppliers you have paid and keep up to date with the collections, knowing the due date to demand payment of unpaid invoices from customers.
Prevent losses
Bank reconciliation is vital to avoid business losses. This procedure will allow you to detect uncollected invoices and possible erroneous charges. In addition, it will help you detect what is not working and those areas generating economic losses so that you can rethink them.
Facilitate decision-making
The more information you have about the financial status of your company, the better decisions you can make. The bank account reconciliation will allow you to make strategic decisions based on reliable and updated data to promote the most prosperous areas and redesign those not giving the expected benefits.
Greater security before an inspection
Bank reconciliation is not required, but you must do it to file quarterly taxes and your annual accounts. In addition, having the accounting up to date and the squared accounts will make you feel more secure, especially in the face of an inspection, since you will have already detected and corrected any errors or mismatches. Thus, you will not have financial problems and will avoid economic sanctions.
Key Points
- A bank reconciliation statement summarizes banking and business activity.
- It reconciles a bank account with its financial records.
- Bank reconciliation statements confirm payment processing and that receipts have been deposited into a bank account.
- All fees charged to an account by a bank must be posted to a reconciliation statement.
- After all the adjustments, the balance mentioned on the bank reconciliation statement must equal the closing bank account balance.
FAQs - Bank Reconciliation
Why is bank reconciliation important for businesses?
Bank reconciliation is crucial for verifying the accuracy of a company's financial records, detecting errors, preventing fraud, and ensuring that the financial statements present an accurate and reliable picture of the business's financial health.
How often should I perform a bank reconciliation?
Bank reconciliations are typically performed every month. However, some businesses with a high volume of transactions may do it more frequently, such as weekly or daily.
Can bank reconciliation uncover fraudulent activities?
Yes, bank reconciliation can help detect fraudulent activities such as unauthorized withdrawals or check forgeries, as these discrepancies would be evident during the reconciliation process.
What is the purpose of documenting bank reconciliations?
Documentation of bank reconciliations serves as an audit trail and provides evidence that the company has appropriately reviewed and reconciled its bank transactions.
What should I do if I can't reconcile my bank accounts despite my efforts?
If you cannot reconcile your bank accounts, thoroughly review all transactions, check for errors, and consider seeking assistance from an accountant or financial professional who can help identify and resolve the discrepancies.
Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio
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