What is Bank Reconciliation?
Definition: Bank reconciliation, of bank rec for short, is the procedure of matching amounts on bookkeeping records with their corresponding figures on bank statements. This is an essential aspect of financial management. In accounting, every credit must always be matched with a corresponding debit to balance the accounts. Thus, every payment is matched with the relevant invoice to balance the amounts.
Therefore, a bank reconciliation statement tries to match the cash balance on a balance sheet with a corresponding bank statement. The reconciliation process helps to ascertain the need for accounting changes.
The reconciliation process seeks to ensure that payments are processed, and cash collections are deposited in a bank account.
How a Bank Reconciliation Works
A bank statement lists all customer payments received as well as payments made by a business or an individual during a period. Each payment, in this case, matche an invoice that was sent and the corresponding amount received into the records. These two amounts must match when it comes to the matching process. Likewise, any amount paid out must be registered’ as an expense and removed from a bank account.
In some situations, a transaction might appear on an accounting record but not in a bank statement. Such transactions are often considered as ‘outstanding’ and may represent possible discrepancies between accounting records and a bank statement.
To reconcile your accounts, all you need to do is compare the internal record of transactions with your monthly bank statement. Each transaction should be verified individually as a way of ensuring amounts match perfectly.
While reconciling, it is common to find transactions that don’t match due to timing. Items that haven’t cleared from the bank can lead to a disparity between a bank statement and an accounts record.
Bank Reconciliation Discrepancies Explained
Bank reconciliation discrepancies could arise because of cheques indicating different amounts to the amount received in a bank. Likewise, checks and cash received and recorded by a company but yet to be logged in a bank statement could trigger bank reconciliation discrepancies.
Whenever a bank deducts charges, without business knowledge, for service offered, a bank statement may end up showing a different amount on the accounting record.
In a bid to avoid bank reconciliation discrepancies, financial institutions are increasingly using specialized accounting software. The software reduces the amount of work and adjustments needed to enable real-time updates. With the new software, banks and individuals no longer have to match bank statements with accounting records manually. By uploading a bank statement, the software would be able to match transactions on the bank statement and the invoice.
Bank Reconciliation Purpose
Bank reconciliation is an essential process as it helps in the detection of problems before they get out of hand. Some of the things to look out for in bank reconciliation include checking whether checks issued were duplicated’ or changed, resulting in more money being withdrawn.
In addition to helping in the detection of double payments or calculation errors, bank reconciliation can also help in the tracking and adding of bank fees as well as penalties in the books. The process can also help in keeping track of accounts payable and receivables.
Likewise, one should check whether checks were issued’ and cleared without authorization. The bank reconciliation process should also ascertain whether unauthorized transfers were made out of an account, leading to a disparity between a bank statement and an account record. It is also common to find accounts missing deposits.
Bank reconciliation also helps in sorting out internal administrative issues. The process can help one reevaluate the best way to handle cash flow and accounts receivable or carry out changes in the recordkeeping system and accounting process.
Summary
Bank reconciliation should be carried out at least once a month for high volume businesses. For businesses with a high risk of fraud, then the bank reconciliation should be carried out more often as a way of detecting and correcting discrepancies before things get out of hand.