Bank reconciliation is crucial, especially at the close of an accounting month. Yet, it often takes considerable time, sometimes several days or even up to two weeks, to resolve discrepancies between the bank system and accounting records.
These discrepancies can consume valuable time as executives navigate complex ERP systems, multi-currency banking portals, and various reporting tools. However, by implementing unified transaction monitoring across global operations, reconciliation evolves from a time-consuming back-office task into a strategic asset.
This blog will delve into the bank reconciliation process, its benefits, and how it enhances financial accuracy and decision-making for global enterprises.
Definition and Purpose of Bank Reconciliation
Bank reconciliation is comparing and matching the transactions in a company's financial records (such as the general ledger) with those in its bank statement.
Bank reconciliation ensures that the company’s cash records are accurate, consistent, and up-to-date. This process involves reviewing all deposits, withdrawals, fees, and other transactions recorded by the bank and the company.
Missed transactions, bank fees, or errors in recording deposits and withdrawals are some common discrepancies during bank reconciliation.
Types of Bank Reconciliation
Bank reconciliation isn't a one-size-fits-all solution. It depends on the specific needs and structure of your business. Here are the three main types of bank reconciliations.
Periodic Reconciliation
This method involves reconciling your accounts regularly, such as monthly or quarterly. It’s a traditional approach where you periodically review and match your bank records to spot discrepancies over a set time frame.
Continuous Reconciliation
With continuous reconciliation, the process is done more frequently, often in real time. This approach helps keep your financial records up-to-date and identify issues as soon as they occur.
Inter-Company Reconciliation
Used by businesses with multiple subsidiaries or entities, this type of reconciliation focuses on ensuring that transactions between different parts of the organization are accurately recorded and aligned.
Each type of bank reconciliation serves a specific purpose in maintaining the accuracy of your financial records. To effectively reconcile your bank records with your bank statement, it's crucial to understand the common reasons for any discrepancies.
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What are the Reasons for the Difference Between Bank Records and Bank Statements?
Various factors can cause discrepancies between a business's internal financial records (bank records) and the official bank statement issued by the bank. However, these differences are usually identified during bank reconciliation.
Timing Differences
These occur when there is a delay in recording or clearing transactions between the business and the bank.
For example, a business payment may not show in the bank account until the following day, or a check issued may not be processed by the bank for several days. These timing gaps cause differences between the bank balance and the business's records, which can be reconciled by adjusting the cash book for unprocessed checks or deposits.
Bank Charges and Interest
These are fees or interest that the bank applies without the business's prior knowledge.
For example, the bank may deduct a monthly fee or charge for an overdraft, or it may credit interest on a business's savings account. These charges affect the bank balance but are not reflected in the business's cash book (record) unless notified by the bank.
Direct Debits and Credits
These transactions, initiated or authorized by the bank, include automatic payments like utility bills or loan installments, or receipts such as rent or interest payments.
For example, they impact the bank balance but may not be recorded in the business's cash book unless the company is informed.
Errors
Errors can occur either by the bank or the business when recording transactions.
For example, the bank might mistakenly record a deposit as a withdrawal, or the business may duplicate a transaction or post it incorrectly. These mistakes lead to discrepancies between the bank and cash book balances, which can be corrected by identifying and fixing the errors.
Fraud and Unauthorized Transactions
Fraudulent activities such as stolen checks, forged signatures, or unauthorized online transactions can affect the bank balance but may not be reflected in the cash book.
For example, these discrepancies must be reported to the bank, and, if necessary, law enforcement must adjust the cash book to reconcile them with the bank balance.
Once you've identified the causes of these discrepancies, the next step is to follow a structured process to reconcile your bank records with the bank statement. This ensures that all records are accurate and in alignment, allowing for a clear financial picture.
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Steps in the Bank Reconciliation Process
Here is a detailed explanation of the steps in the bank reconciliation process.
Step 1: Gather Necessary Documents
Before you start the reconciliation process, gather documents like the bank statement, which summarises your bank's transactions during the period (usually monthly). You'll also need your internal records, such as your general ledger or cash book, which detail the transactions recorded by your business. Both sets of documents should cover the same period, so you can accurately compare them.
Step 2: Compare Deposits
Next, compare the deposits in your internal records with those in the bank statement. Check each deposit to ensure that the amounts match.
If there are any discrepancies, such as a deposit missing in the bank statement or not recorded in your records, this is the time to identify them and make corrections in both sets of records.
Step 3: Verify Withdrawals and Checks
Review the withdrawals on the bank statement and your internal records, including checks and electronic payments. Ensure they match, as there could be errors or missing transactions.
Step 4: Identify Timing Differences
Timing differences can cause discrepancies between your internal records and the bank statement.
For example, you may have made a deposit that the bank hasn’t processed yet (a deposit in transit) or issued a check that hasn't cleared yet (outstanding checks).
Step 5: Adjust Bank Statement Balance
Once timing differences have been identified, you must adjust the bank statement balance accordingly.
Add any deposits in transit missing from the bank statement and subtract any outstanding checks that have not yet been cashed.
Step 6: Adjust Internal Records
Now, it's time to update your internal records. This includes accounting for any bank service fees, interest income, or NSF (Non-Sufficient Funds) checks that may have been charged by the bank but haven’t yet been recorded in your cash book.
Add any interest income or adjust for service fees, penalties, or bounced checks, as these items may not have been previously recorded.
Step 7: Compare Adjusted Balances
The balances should now match after making all necessary adjustments to the bank statement and internal records.
If they do, the reconciliation process is complete. If not, continue investigating the discrepancies, which might be due to missed transactions, errors, or additional adjustments needed.
Step 8: Document the Reconciliation
Finally, prepare a bank reconciliation statement once the adjustments have been made and the balances match. This statement should summarize the adjustments made to the bank statement and your internal records.
This document serves as a formal report for auditing purposes and ensures that your records are accurate and compliant.
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PayGlocal's GID and MUID (Merchant Unique ID) in your transaction processing system significantly streamline the reconciliation process. By utilizing these unique identifiers, businesses can achieve greater financial accuracy, reduce operational complexities, and maintain robust financial controls.
Small businesses should perform bank reconciliation at least a few days after the month ends, while companies with a high volume of transactions must reconcile daily. It offers several key benefits that contribute to better financial management and decision-making.
Benefits of Regular Bank Reconciliation
Bank reconciliations are a crucial internal control process that busy business owners and managers overlook or delay. Here’s why it pays to perform them regularly.
Fraud Detection
It’s hard to spot fraudulent activity without routine reconciliation. If you don’t check your bank statements regularly, missing deposits could go unnoticed, leading to financial losses.
Financial Reporting Accuracy
While bank statements are accurate, errors can occasionally slip through. By performing regular reconciliation, you ensure that your internal records match the bank’s statement, identifying discrepancies like duplicated transactions or incorrect amounts.
Compliance
Regularly reconciling your bank accounts helps you comply with industry regulations and be ready for audits. It provides a transparent view of your finances, making it easier to meet regulatory requirements.
Cash Flow Management
Regular reconciliation offers a clear picture of your available cash, helping you keep track of funds tied up in pending transactions. It keeps you aware of your financial standing and thus enables you to plan for upcoming expenses.
With PayGlocal's recurring payment features, businesses can track and manage their transactions through a user-friendly dashboard. This makes it easy to manually reconcile recurring payments by comparing transaction records from the PayGlocal dashboard with your internal accounting records and bank statements, ensuring consistency and accuracy in financial reporting.
Common Challenges of Manual Bank Reconciliation
Manual reconciliation is prone to data entry errors, requiring the input of large amounts of information manually. This leads to mistakes and time-consuming corrections, which can result in inaccurate financial records, requiring extra time to fix and verify.
Additionally, businesses often face issues handling NSF (Non-Sufficient Funds) checks and unexpected bank fees, further complicating the reconciliation process. These transactions can be missed or incorrectly recorded, causing discrepancies.
Lastly, automating the reconciliation process can improve efficiency by reducing the time spent on manual entry, minimizing errors, and ensuring that all transactions are tracked accurately in real-time payments.
Conclusion
Maintaining up-to-date financial records through regular reconciliation is essential for any business's financial health. It ensures that your accounts are accurate, helps identify discrepancies early, prevents costly errors that can lead to financial mismanagement, avoids the risk of missing payments, and ensures compliance with accounting standards.
Managing cross-border payments can be complex for exporters, freelancers, and small businesses, but PayGlocal simplifies this process. With its robust payment solutions, businesses can handle cross-border payments, multiple currencies, compliance, and provide a unified view of all transactions. Get Started Today!
FAQs
How do I reconcile bank statements with my books?
Reconciling your bank statements with your books involves comparing the transactions in your accounting system with those in your bank statement. This process helps identify discrepancies such as missing entries, errors, or fraudulent activities. While the task can be time-consuming and complex for businesses with high transaction volumes.
What are the three forms of bank reconciliation?
The three primary methods of bank reconciliation are:
- Adjusted Balance Method – Adjustments are made directly to the balance.
- Bank Statement Method – Adjustments are made to the bank statement balance.
- Balance Sheet Method – Discrepancies are reconciled between the bank and book balances.
When is a bank reconciliation statement prepared?
A bank reconciliation statement is prepared at regular intervals, at the end of each month, after receiving the bank statement. This process involves comparing the company's internal financial records for outstanding checks or deposits in transit.
