5 Reasons to Justify the Importance of Bank Reconciliation
Bank reconciliation is important in the accounting of the business’ cash. Auditors also use it in audit procedures to review the correctness of company books. But what exactly is bank reconciliation? Also, why do companies do it?
Importance of Bank Reconciliation Explained
Companies use bank reconciliation to compare the company record of cash to that of the bank. Simply put, the company gathers its records of cash receipts and cash disbursements and compares it with the bank statement provided by the bank.
Transactions in the company books must match that of the bank. Matters like the amount received and from whom must reconcile. If there are inconsistencies, the accountant reviews the transaction to look into the reason why the records don’t equal.
It is of course common when the amount reflected in the company books does not equal the amount in the bank statement. It may be because the bank did not yet clear the deposits made by the company. Or it may be because of errors in the company books.
The company then prepares the Statement of Bank Reconciliation. This report presents the reconciling items. This statement shows the items only recorded by one party, i.e by the company or by the bank. Moreover, this report also reveals the errors made by either party. Errors made by the company are then adjusted in the books to reflect the correct amounts.
Bank reconciliation may seem like a menial task. However, it is one of the simplest tools that may uncover errors or frauds. Here are 5 convincing reasons why you should believe in the importance of bank reconciliation.
1. Safeguards Cash
Cash is one of the easiest items to steal or misuse. A person can effortlessly make money from the registry without getting caught. Furthermore, cash theft is also easily concealed. Your cash custodian could simply steal cash by voiding a sale transaction.
Bank reconciliation is one way to protect cash. This happens especially if an independent individual completes a bank reconciliation, i.e. by a person not handling cash or records of cash transactions. Adding ways to review records reduces the chances of cash theft.
2. Uncovers Errors
The company needs accurate records to make relevant decisions. One importance of bank reconciliation is that it uncovers errors. Did your bookkeeper erroneously transpose the amounts recorded? Did they record a transaction twice? Errors like these are revealed when doing bank reconciliation. It adds accuracy to your books, and consequently in your financial reports.
3. Way to Catch Fraud
Bank reconciliation ensures that all cash receipts and payments that have gone through the bank records are reviewed. This may reveal unauthorized checks, bogus vendors, missing deposits, and other fraud schemes. Preventing and detecting fraud before it causes big monetary and reputational damage is important. Integrating proper controls like bank reconciliation helps protect your business.
4. Detects Administrative Issues
Another importance of bank reconciliation is its ability to recognize administrative issues. For example, a bank reconciliation might reveal numerous bounced checks from customers. This might indicate problems in your credit acceptance rules.
Reconciliation exposes patterns you would not usually discover if you do not do bank reconciliation. For instance, you might see that you are paying more interest because you are always late in paying your vendors. You may need to be more strict in your credit terms because you realize that customers are not paying their dues. Detecting these issues earlier prevents worse problems in the future.
5. Verifies Cash Flows
Bank reconciliation is extra helpful to small businesses. Because they have smaller capital, it is very important to track their cash flows. As such, bank reconciliation allows owners to see if their money is doing as expected. Further, the Statement of Bank Reconciliation is an additional assessment of the company’s stability. That is if the company can make and spend cash effectively.
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