What is Bank Reconciliation & Why Is It Important

What is bank reconciliation?

Bank reconciliation is the process of matching entries (e.g., customer payments, bank fees, etc.) on the company’s cash books with the corresponding data on its bank statements.

A lot of time and resources go into account reconciliation, making it an exhaustive and error-prone process. Hence, businesses must look to improve their bank reconciliation process to make it faster and more accurate.

What is the purpose of bank reconciliation?

Bank reconciliation plays an important role in getting detailed visibility into cash availability, accurate reporting, fraud detection, faster financial close, and seamless audits. Regular bank reconciliations can help businesses identify any conflicting items on bank statements and take necessary action immediately. It is imperative that businesses remain prepared for regular bank reconciliations and adopt best practices in bank reconciliation to handle an increasing volume of bank statements amid business growth.

Why is it important to reconcile your bank statements?

Bank reconciliation is crucial for small businesses to ensure the recorded balance matches the bank’s reported balance. It effectively manages cash flow and maintains accurate financial records, providing valuable insights into the company’s financial position.

Regular bank reconciliation maintains detects discrepancies like errors or fraud, prevents financial losses, and safeguards resources. It helps uncover unnoticed fees, unauthorized charges, or fraudulent transactions, enhancing financial transparency, decision-making, and overall financial stability.

To start with, businesses can adopt bank reconciliation templates to match bank statements with the cash book. Spreadsheet-based bank reconciliation template is free and easy to use. However, they have limitations when it comes to allowing collaboration and ensuring the speed and accuracy of processing.

What are the advantages of a bank reconciliation statement?

Here are some benefits of bank reconciliations:

1. Identifying errors: Bank reconciliations can help you identify errors in your accounting records, such as missing or duplicate transactions. This can help you catch mistakes before they become bigger problems.
2. Preventing fraud: Bank reconciliations can also help prevent fraud by detecting unauthorized transactions or suspicious activity in your bank account.
3. Improving cash flow: By reconciling your bank account regularly, you can keep track of your cash flow and ensure that you have enough funds to cover your expenses.
4. Saving time: Bank reconciliation can be a time-consuming task, but it’s worth the effort. By reconciling your bank account regularly, you can save time in the long run by avoiding mistakes and catching errors early.

Manual bank reconciliations vs Automated bank reconciliations

Manual bank account reconciliation means accountants rely heavily on spreadsheets and other manual methods for financial reporting. Automated bank reconciliation optimizes the process by identifying and resolving anomalies using advanced technologies, such as AI,  for faster and more accurate bank account reconciliation and financial close. 

Drawbacks of manual bank reconciliations

• Error-prone and time-consuming: Each transaction and its amount have to be matched, and unreconciled items should be identified manually or using spreadsheets, which makes the process extremely time-consuming and error-prone. In many cases, accountants end up with bank reconciliation statements saying cash book balance more than bank account balance or vice versa. 
• Inaccurate account risk assessment: Risk assessment of accounts using spreadsheets and other manual methods of reconciliations leads to inaccurate account prioritization. 
• No visibility and control: Usage of  spreadsheets limits visibility and control throughout the entire bank account reconciliation process.
• No standardized data documentation: A siloed approach involving spreadsheets leads several accountants to follow their own specific data documentation layouts, formats, and calculations, which further impedes the financial close. 

Benefits of automated bank reconciliations

• Fast and accurate: AI-based anomaly detection enables faster financial close and accurate reconciliation of bank statements and general ledger (GL) and GL and sub-ledger, saving accountants from manual work and making the process faster and more accurate.
• Proactive risk assessment: AI-powered reconciliation allows accountants to prioritize reconciliations by risk, value thresholds, and other key parameters and auto-assign reconciliations to users/user groups.
• Improved visibility and control: Real-time dashboard offers visibility to all stakeholders on the status of reconciliation, dependencies, and any required action.
• Standardized data documentation: Automation software for account reconciliation allows users to leverage pre-configured reconciliation templates (or create their own templates) to accelerate the reconciliation process. Transactional data analysis, computations, and document creation can be done in the same template. 

HighRadius Autonomous Accounting Solution

HighRadius’ Account Reconciliation software helps you leverage an out-of-the-box matching rule system, and analyze large volumes of data with accuracy, thereby reducing reporting errors.

Watch the video to know how HighRadius helps you improve your reconciliation accuracy by 90%.

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FAQs

Why is it important to reconcile your bank statements?

Reconciling your bank statements is important because it ensures that your financial records accurately reflect your actual bank account balance. This helps to identify any discrepancies or errors, prevent fraud, and provides valuable insights into your cash flow and financial health.

Is bank reconciliation a ledger?

Bank reconciliation is not a ledger itself, but rather a process or a tool used to ensure the accuracy and consistency between a company’s bank account records and its own accounting records.

What is the most important step for reconciling bank reconciliation?

The most important step in reconciling a bank statement is to compare the transactions recorded in the company’s accounting records (ledger) with the transactions listed in the bank statement – every month. This step involves carefully reviewing each transaction and ensuring that they match.

Who should prepare a bank reconciliation?

Bank reconciliations are typically prepared by the company’s accounting or finance department. Specifically, it is often the responsibility of the company’s bookkeeper or accountant to perform the bank reconciliation process.