Bank reconciliation is the process of matching the balances in an organisation’s accounting records for a cash account to the corresponding information on a bank statement. The objective of this is to ascertain the differences between the two, and post changes to the accounting records. The information on the bank statement is the bank’s record of all transactions, which affects the entity’s bank account during a period.
A bank reconciliation should be process regularly for all bank accounts. This is to ensure that a company’s cash records are correct. Otherwise, it may find that cash balances are much lower than expected. Bank reconciliation will also detect some types of fraud after the fact. This information can be used to design better controls over the receipt and payment of cash.
As part of our operations at SOW Professional, during a reconciliation for a Client in 2017. We discovered N13.4 Million was wrongly paid into their accounts, by one of their Clients (Agency of Government). Ironically, the organization never knew about this until we requested our Client to send a letter to verify this.
Also, in 2018, while reviewing the bank statement of a Client in the Oil & Gas, we discovered that $30,000 was paid twice to same organisation for same purpose. On our verification, the vendor was requested to refund after about seven months.
Why Bank Balance Will Differ from a Company’s Balance
Some of the reasons for difference between the balance on the bank statement and the balance on the books include:
- Outstanding checks
- Deposits in transit
- Bank service charges and check printing charges
- Standing orders
- Errors on the company’s books
- Bank errors due to over deductions
- Fraud on accounts from either the bank or the company
- Electronic charges and deposits that appear on the bank statement but are not yet recorded in the company’s records
To reconcile your accounts, compare your internal record of transactions and balances to your monthly bank statement. Go through each transaction individually, so as to ensure, the amounts match perfectly.
You also ensure that your bank statements show an ending account balance, which agrees with your internal records (cashbook or ledger), or, you have specific explanations for the difference.
The process can be as formal or informal as you like, and some businesses create a bank reconciliation statement to document their results. If you do not do the process monthly, you can perform it daily, quarterly or any other period for which you choose.
Your accounting system should give access to all of the transaction data you need, or you might have your data in a manually-maintained check register. Your bank can provide online access to your account, allowing you to view and download transactions regularly for comparison.
Likewise, an automatic electronic payment might hit your account a day before or after the end of the month. Thereafter, you expected to see it in a different month, however, as long as you can easily account for these discrepancies, there is probably no need to worry.
3 key Importance of Bank Reconciliation
- Help you identify problems before they get out of hand: Since you will not receive protection for business bank accounts as you would for consumer accounts. Which mean you cannot count on the bank to cover fraud or errors in your account. So therefore, regular review will help to identify any issue for quick response.
- Expose Fraud Before It is Too Late:
Make any signs of fraud your priority and be suspicious when reconciling the transactions made in your bank account.
- Confirm, if issued checks are not duplicated or changed. This will result in more money leaving your checking account?
- Were checks issued without authorization?
- Are there unauthorized transfers out of the account, or has anybody made unauthorized withdrawals?
- Does the account have any missing deposits?
- Prevent Administrative Problems:
Reconciling your account also helps you identify account management or administrative issues that need attention. For example, you might need to reevaluate how you handle cash flow and accounts receivable, or perhaps change your record keeping system and the accounting processes you use.
Proper processes for managing your banking transactions will ensure the following:
- Knowing how much cash you really have available in your accounts
- Avoiding bounced checks (or making failed electronic payments) to partners and suppliers
- Avoiding bank fees for insufficient fund (dud cheque) or using up lines of credit, when you don’t really need to
- Knowing if customer payments have bounced or failed and if any action is needed
- Keeping track of your outstanding checks
- Making sure every transaction gets entered into your accounting system properly
- Catching any bank errors
At a minimum, SME’s should conduct bank reconciliation shortly after the end of each month. It is even better to conduct bank reconciliation every day, based on the bank’s month-to-date information. If you carry out a bank reconciliation every day, you can spot and correct problems immediately.
The essential process flow for a bank reconciliation is to start with the bank’s ending cash balance. Add any deposits in transit from the company to the bank, subtract any checks that have not yet cleared in the bank. After which, either add or deduct any other items. Then, go to the company’s ending cash balance and deduct from it any bank service fees and penalties, and add any interest earned. At the end of this process, the adjusted bank balance should equal the company’s ending adjusted cash balance.
Template of Bank Reconciliation
|Bank Reconciliation Statement as at 31 January 20X1|
|Balance as per cash book
Add: Correction of error on rent paid
Less: Charitable subscription paid so
Balance per Bank statement
Add: Uncredited deposits (outstanding)
Less: Unpresented cheques (outstanding)
Corrected cash book balance
For more information:
At SOW Professional Services, we understand the benefits of bank reconciliation to organisations and can assist you with the process. Call us on 07038254989 or send a mail to email@example.com, on how we can help you on this.