A bank reconciliation is the process of matching the balances of your bank/cash accounting records to the corresponding information on a bank statement.
The importance of bank reconciliation
- To ensure that your accounting records accurately reflects the available funds in your bank. Without accurate information, it will poss challenges in decision making for a business.
- To detect and rectify any errors either in the accounting or administrative processes.
- Is there a missing cheque?
- Was there a missing entry?
- Was a cheque issued for the wrong amount?
Through the reconciliation process, you'll be able to identify many of these potential hiccups.
- To mitigate risk of fraudulence. By comparing your accounts with your bank statement, you'll also be able to easily detect unauthorized outflow of funds and duplication/changes of cheques.
Why are they not balance?
Don't worry! More often than not, you'll find your bank statement not balanced with your funds reflected in your accounts.
This is mainly due to timing issue, 'funds in transit'. The following is a common scenario:
- A deposited cheque / fund transfer (GIRO) has not been cleared or processed by the bank at the time of reconciliation. This applies to both payments issued and received.
Another reason for slight variances could be due to additional charges from the bank for services rendered or penalties incurred.
When should I do my bank reconciliation?
The general advice is to conduct your bank reconciliation on a monthly basis, shortly after the end of each month upon receiving your bank statement.
The future of bank reconciliation
While bank reconciliation is an important accounting procedure in ensuring accuracy of accounts, it continues to be a widely hated process by accountants and non-accountants alike due to how tedious the process is.
Through local partnerships with banks, we are inching closer each to making live bank feeds a reality. With that, your accounting software will be able to automatically update a payment received and issued once processed by the bank.
Now that you are familiar with bank reconciliation, let's find out how you can conduct the reconciliation process in Financio.