BANK RECONCILIATION WHY IS IT IMPORTANT
BANK RECONCILIATION AND WHY IT IS IMPORTANT FOR BUSINESS
WHAT IS BANK RECONCILIATION?
A bank reconciliation statement is a document that compares the cash balance on a company’s balance sheet to the corresponding amount on its bank statement. Reconciling the two accounts helps identify whether accounting changes are needed. Bank reconciliations are completed at regular intervals to ensure that the company’s cash records are correct. They also help detect fraud and any cash manipulations.
Importance of Reconciling
Bank reconciliations statement helps you in detecting and spotting fraudulent transactions. It is advisable to employ an independent person to perform the reconciliations for preventing the accounting employee from falsifying your books and reconciliations.
A few things to consider include:
- Were legitimate checks that you issued duplicated or changed, resulting in more money leaving your checking account?
- Were checks issued without authorization?
- Are there unauthorized transfers out of the account, or did anybody make unauthorized cash withdrawals?
- Does the account have any missing deposits?
Prevent Administrative Problems
Reconciling your account also helps you identify internal administrative issues that need attention.
Proper processes for managing your banking transactions result in outcomes such as:
- Knowing how much cash you really have available in your accounts
- Avoiding bounced checks (or failing to make electronic payments) to partners and suppliers
- Avoiding bank fees for insufficient funds or using lines of credit when you don’t really need to
- Knowing if customer payments have bounced or failed, and determining if any action is needed
- Keeping track of your outstanding checks and following up with payees
- Making sure every transaction gets entered into your accounting system properly
- Catching any bank errors
Best Time to Reconcile
It’s wise to review your accounts at least monthly. For high-volume businesses or situations with a higher risk of fraud, you may need to reconcile your bank transactions even more often. Some companies reconcile their bank accounts daily.
You can also build protection into your bank accounts, and your bank can provide useful ideas. For example, many banks offer a solution called Positive Pay, which prevents your bank from approving payments out of your account unless you specifically provide instructions to approve individual payments in advance.
Tips to ensure efficient BRS
1. Firstly, it’s essential to have all the required documentation and information in hand. That means, if all the required documentation and information are at your disposal you get a better view of things.
2. Avoiding common errors, such as:
- Error relating to duplication of entries.
- Not accounting for a transaction that would cause a difference equal to the missed amount
- Errors while entering commas and dots, which cause discrepancies that, could be of significant value. For instance, instead of entering INR 2,401.30, entering INR 240.13.
- Transposition errors while entering figures in the books. For instance, instead of entering INR 221,200, entering INR 212,200.
3. Banks can make mistakes too: It is possible that your bank might have committed a mistake. They might debit incorrect amounts from your account, or credit deposits which doesn’t belong to you. For this reason, in case you find errors for which you don’t find any explanations, or for which you’re in doubt, the best thing is to consult your bank.
- Reconciling items: Listing differences and reconciling them and then forgetting it is possible. In case differences keep on accumulating with no action taken, your bank reconciliation would become meaningless. It is needed that a constant check is kept on the reconciled transactions so that they are reflected in the right way in the bank column of the cash book and in the bank statement.