Harmony is knowing your financial position!
Reconciliation is the process of ensuring that two sets of records (usually the balances of two accounts) agree. Reconciliation is used to ensure that the money leaving an account matches the actual money spent. This is done by making sure the balances match at the end of a particular accounting period.
The need for bank reconciliation
Reconciling your accounts is important as it helps detect any mistakes, discrepancies, or fraud in your accounting books that could severely impact the financial health of your company. Reconciliation is a good business practice that can help the success of a business.
The business cash records should be compared to the bank statement by preparing a reconciliation on a regular basis to gain control.
It is unlikely that at any given date, the balance of ‘Cash at Bank’ account on the business ledger account agrees with the balance of the bank statements. The reason for this could be due to the following:
- Outstanding cheques or deposits and electronic transactions from the previous reconciliation
- Dishonored cheques due to insufficient funds in the drawer’s account
- Direct deposits from customer, bank interest revenue, dividends or rent received paid into the bank account – all which will not have been recorded in the Cash Receipts journal
- Late deposits for cheques already entered in the Cash Payments Journal
- Bank charges (i.e. account fees, interest) which are not able to be entered into the Cash Payments Journal until you receive the bank statement
- Administration errors such as an incorrect amounts entered
5 Key Reasons to Reconciliate Monthly:
- Track Cashflow – this will help you plan when you collect and spend money.
- Keep on top of Account Receivable – keep on top of debtors especially if you operate on an Accrual System.
- Get a true and realistic representation of your business – this will assist in how you spend and reinvest.
- Detect Bank errors – not a common occurrence, however they still occur.
- Detect fraud – it is easier to notice anomalies when your business transactions are fresh in your memory, allowing you to easily spot fraudulent activity.
Bank reconciliation software can help fully automate this process allowing more time to be spent on analyzing reports and improving other areas of the business. Make sure to keep an eye on bank feeds as on occasion information can be missed or duplicated due to a server glitch or internet drop out.
There is a certain satisfaction when reaching $0.00 difference after completing the monthly task of reconciliation, giving you the sense of confidence and control and most importantly, peace of mind!