A bank reconciliation statement is a document prepared by a company that shows its recorded bank account balance matches the balance the bank lists. This statement includes all transactions, such as deposits and withdrawals, from a given timeframe. Show
Many companies produce bank reconciliation statements regularly to ensure they’ve recorded all their banking transactions properly and that their ending balance matches the amount the bank says they have. What is the purpose of a bank reconciliation statement?Bank reconciliation statements can help identify accounting errors, discrepancies and fraud. For instance, if the company’s records indicate a payment was collected and deposited, yet the bank statement does not show such a deposit, there may have been a mistake or fraud. Making sure a company’s and its bank’s listed balances align is also a way to ensure the account has sufficient funds to cover company expenditures. The process enables the company to record any interest payments the account has earned or fees the bank has charged. The reconciliation process allows a business to understand its cash flow and manage its accounts payable and receivable. How to do a bank reconciliationBefore sitting down to reconcile your business and bank records, gather your company ledger and the current and previous bank statements. You can get a template online to use for your bank reconciliation statement, or you can use a spreadsheet. Step 1: Find the starting balanceIf you’re doing a reconciliation every month, your starting balance will be the final balance from the previous month. Step 2: Review the deposits and withdrawalsCheck your ledger’s recorded deposits, withdrawals and cleared checks against those listed on the bank statement. Ensure all of the amounts match up, and investigate any discrepancies. Everything listed on the bank statement should be included in your records and vice versa. Step 3: Adjust the cash balanceStarting with your bank statement balance, add any deposits you’ve made that have not yet cleared. Likewise, deduct any checks that have yet to clear. Your result is the adjusted cash balance. Adjusting the cash balance ensures your ledger’s balance and the bank statement balance will match. Step 4: Account for interest and feesSearch the bank statement for any interest your account earned during the month, then add it to your reconciliation statement. Also, deduct any penalties or fees the bank assessed that your ledger doesn’t list. Step 5: Compare end balancesAfter reviewing all deposits and withdrawals, adjusting the cash balance and accounting for interest and fees, your ledger’s ending balance should match the bank statement balance. If the two balances differ, you’ll need to look through everything to find any discrepancies. These could be your errors or the bank’s. Bank reconciliation exampleRegularly creating a bank reconciliation statement allows you to find errors by comparing your company ledger with your bank statement. Then, you can correct your records as needed. For instance, say your company’s ledger has a recorded ending balance for a given month of $350,000. However, the bank statement lists an amount of $347,000. In comparing your ledger with the bank statement, you find that the record of a company check for $3,000 was inadvertently omitted from your book. You add the check to your records, and now the two balances match up. Bottom lineA bank reconciliation statement is important in managing your business’ finances. This document can help ensure that your bank account has a sufficient balance to cover company expenses. It’s a tool for understanding your company’s cash flow and managing accounts payable and receivable. If you haven’t been using bank reconciliation statements, now is the best time to start. Both internal and external audits are essential to the organization for effective risk mitigation, so it is crucial to ensure that they are done properly. The bank reconciliation process, in particular, helps to identify any financial gaps or discrepancies and should be performed internally at least once a month and once per year by an external auditor. Discover seven essential steps for auditing your organization’s bank reconciliation statements. 7 Steps to Audit Your Bank Reconciliation StatementDiscover the 7 essential steps for auditing your organization's bank reconciliation statements with this checklist. Download the Checklist Checklist for An In-House Bank Reconciliation Audit
The Problem With A Manual AuditAuditing the organization’s bank reconciliation documents by hand is both tedious and prone to human error. What if the auditor accidentally misreads a figure? Or misses a gap in the numbers? Even though accountants are highly trained and sensitive to numbers and errors, they are human and will inevitably, unintentionally overlook something. A Forrester study found that many finance leaders and front-line accountants were aware of both the financial and reputational risk that spreadsheets present to the organization. Even though 53% of the respondents of the Forrester Study were concerned about spreadsheet risk, almost 50% of them also solely relied on the tool for their auditing and controls.It’s time to evaluate a new tool, not only for an effective control framework and audit process but for the balance sheet reconciliations overall. The accounting department is responsible for mitigating risk for the organization, not adding to the concern. A Better Alternative: Traditional Reconciliation Process vs. A Reconciliation ToolReconciliations form the foundation of the entire financial close, which means that they are also the most time-consuming. With traditional reconciliation methods, accountants must review and reconcile each account and statement individually. A process like this can take hours or even weeks to perform, and more time on top of that to go through and audit later on. An automated reconciliation tool not only simplifies the process itself but the audit as well. First, financial automation is applied to rule-based, repetitive activities— which is exactly what the reconciliation process is. Rather than manually reviewing and reconciling accounts, the system automatically reconciles based on pre-determined criteria. Second, if the system detects any discrepancies or suspicious activity while reconciling, it flags those accounts and notifies an accountant. Now, the accountant can go through the exceptions and figure out the source of the error and how to prevent it from happening again in the future. Lastly, an automated audit trail is generated alongside reconciliations and task completion. The audit trail includes a history of supporting documentation along with all activity that happens throughout the process. Whether for an internal or external audit, an auditor-only view can be created so that the viewers can only see the information required for the audit. Accountants don’t have to spend the majority of their time reconciling by hand and auditors no longer have to sift through piles or complicated document reservoirs to find the information they need. Additional Benefits of Automated Bank ReconciliationsInvesting in an automated reconciliation tool gives accountants a large amount of their time back; how better to leverage this time than prioritizing strategic activities like further mitigating risk or gathering data analytics? Accountants can now support the organization’s future goals and growth rather than just cranking out the reporting every month.
Leaning on financial automation delivers more value to the organization each period than depending on frustrating manual approaches. Explore how Adra can simplify your reconciliation process to leverage all these benefits for your organization. Written by: Ashton Mathai Share |