How often do you reconcile your company’s internal financial records against your bank statements? Bank reconciliations are an essential internal control procedure that busy owners and managers sometimes overlook or neglect. Here’s why it pays to perform them regularly.
Operational benefits
Weekly or monthly bank reconciliations can improve the accuracy of your company’s financial records. You may uncover errors and omissions, allowing you to take corrective measures before internal problems spiral out of control. Bank reconciliations can also be an effective antifraud control. In addition to revealing fraudulent transactions, bank reconciliations may deter dishonest workers from engaging in criminal activity because they know someone is checking their work.
Moreover, bank recs improve accounts receivable management. For instance, if you notice bounced checks and bank overdraft fees when reconciling deposits, you might consider changing the credit terms for certain high-risk customers.
The reconciliation process
Typically, a bank reconciliation statement starts with the cash balance from the bank statement. After adding deposits in transit and subtracting outstanding checks, you’ll arrive at the adjusted bank balance. In other words, you’re adjusting the bank balance for transactions entered in the company’s books but not yet posted to the bank account.
Next, reference the checking account balance from the company’s accounting records. You’ll arrive at the adjusted book balance after adding interest income and subtracting bank fees. The bank has posted these transactions to the account, but they aren’t yet recorded in the general ledger.
The adjusted bank balance should equal the adjusted book balance. If not, you’ll need to determine the source(s) of the discrepancy.
Automation tools
Accounting software dramatically simplifies the bank reconciliation process by automating much of the matching and reporting. However, it’s not entirely hands-off. Regular review and manual adjustments may still be necessary to ensure accuracy and address discrepancies.
For example, manual review is often necessary for certain transactions that may be unrecognizable due to:
- Discrepancies in dates, amounts or descriptions,
- Bank errors,
- Duplicate transactions, and
- Adjustments for such items as bank fees, interest income or manual journal entries.
Initially, accounting personnel may need outside help setting up rules within the software to categorize recurring transactions.
Business intelligence
Reviewing the reports generated by your accounting software can help you manage cash flow more effectively and detect fraudulent activity. For example, you may unearth unauthorized transactions, altered checks or phishing scams targeting the business’s account.
It’s critical to report fraudulent automated clearing house (ACH) transactions immediately. Reporting timeframes may vary by bank and jurisdiction, with some requiring notification within 24 hours. Notification for fraudulent checks is typically 30 to 60 days but can vary by state and financial institution. The sooner you report fraudulent transactions, the better. It will give you and your bank more time to protect your funds, including closing existing accounts and opening new ones.
From discrepancy to clarity
Regular bank reconciliations are more than bookkeeping tasks — they’re crucial for safeguarding a business’s financial health and operational integrity. Contact us for more information. We can help streamline the reconciliation process, determine the sources of hard-to-find discrepancies and investigate suspicious activity.
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