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What is Bank Reconciliation & Why Is It Important for Your Business?

29 December, 2021
8 min read
Brett Johnson, AVP, Global Enablement
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What you'll learn

  • Bank reconciliation software helps improve internal business controls and ensures transparency
  • Accurate reconciliation of your book balance and your bank balance helps avoid fraud and delay in processing check payments

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8 min 34 sec
CONTENT
What Do You Mean by Bank Reconciliation?
What’s the importance of bank reconciliation in accounting?
How to Prepare a Bank Reconciliation Statement?
What are the Challenges Encountered While Reconciling Bank Statements manually?
Benefits of bank reconciliation software
HighRadius Autonomous Accounting solution streamlines bank reconciliation.
Frequently asked questions (FAQs) for bank reconciliation
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    As a financial leader, it is important to keep a close tab on your cash balance, and ensure the accuracy of the various ongoing transactions. Therefore, bank reconciliation process holds a lot of importance in finance and accounting. In this blog, we will introduce you to the fundamentals of bank reconciliation, what are the benefits of bank reconciliation, how organizations create bank reconciliation statements and how they can improve the accuracy rates of reconciliation with automation.

    What Do You Mean by Bank Reconciliation?

    Bank reconciliation is the process of comparing data on cash books with the corresponding data on the bank statements. It is a crucial process for the CFO’s office and ensures the accuracy of accounting records.

    What is the difference between a cash book and a bank statement?

    A cash book balance indicates the transactions added to the organization’s general ledger, while the bank statement balance indicates the cash balance on the bank statement.

    What’s the importance of bank reconciliation in accounting?

    Bank reconciliation accounts for all incoming and outgoing transactions (e.g. Incoming customer payments, interest, outgoing vendor payments, bank fees, customer refunds, intercompany payments/recharges) on the bank statement and gives clarity on the cash flow. Regular bank reconciliations help detect accounting errors and enable faster financial close.  

    Periodic bank reconciliations also help the CFO’s office identify possible errors in transactions and fraudulent activities to minimize unnecessary financial loss to the company.

    Bank reconciliation ensures:

    • Accurate cash visibility and financial transaction details
    • Accurate financial representation by detecting and preventing missing entries
    • A reduction in bounced checks, which improves brand trust and helps earn flexible payment terms
    • Better decisions for payment collections
    • Reduction in fraudulent activities
    • Improved bookkeeping and increased business confidence

    How to Prepare a Bank Reconciliation Statement?

    Sample bank reconciliation statement

    To create a bank reconciliation statement, finance teams need to:

    1. Check the bank statement against the general ledger
    2. Add any deposits in transit to the cash balance reported on the bank statement
    3. Subtract any outstanding checks to get the updated bank cash balance
    4. Then, to the company’s final cash balance, add any interest earned and the number of notes receivable
    5. Adjust the cash balance of the corporation; deduct any bank service fees, fines, and NSF checks
    6. Compare the balances and, if necessary, add journal entries

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    What are the Challenges Encountered While Reconciling Bank Statements manually?

    Accurate daily bank reconciliation statements are vital to the success of all businesses. Manually reconciling statements daily is difficult. Below, we list some challenges faced in reconciling bank statements manually:

    • Missed or late reconciliations: Manual processes may result in irregular reconciliations that fail to guarantee that all account balances are in sync, and often don’t provide a clear picture of your financial situation.
    • Delayed data entries: Manually logging into the banking systems to pull bank statements and access the ERP system to analyze and match them with the cash balance is time-consuming.
    • Higher chance of reconciliation errors: When reconciling manually, there is a greater chance of committing errors such as data mismatching, wrong data entries, etc.
    • Duplicate payment records and oversights: Duplicates arise when a supplier gets paid twice, and sometimes, transactions may be forgotten about and never added to your ledger.
    • Uncertain timing: Deposits or cheques that were not shown on bank statements sent a while ago may result in a lack of visibility into your actual cash position.
    • Lack of a central system for auditing: Maintaining paper-based audit trails might be challenging if reconciliation is performed manually.

    The need for automated bank reconciliation 

    Using automation reduces errors when entering data and reconciling statements. A cloud-based bank reconciliation software can equip your finance team to automate the banking reconciliation procedure by automatically comparing bank statements, carrying over information and open items from previous periods, and accessing real-time general ledger balances in ERPs. The accounting staff can then electronically sign these account reconciliations before submitting them to a reviewer for approval. Once the information has been authorized, it can be saved as an audit trail in the software’s database.

    Overall, bank reconciliation automation can help with assurance, detection, rectification, and prevention of frauds, missing transactions, financial statement misrepresentation, and unreconciled open entries in the general ledger, among other things.

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    Benefits of bank reconciliation software

    Automation in bank reconciliation would help your teams stay on top of their cash balances with 100% accuracy, while also maintaining team motivation and staff satisfaction by relieving staff of repetitive manual work and allowing them to focus on other tasks. 

    • More efficient: It automates the process, improving accuracy and reducing audit risks. It also supports straight-through reconciliation without the need for human intervention, unless in exceptional cases. Using automation in bank reconciliation decreases human intervention by up to 90%.
    • Time-saving: With automatic reconciliation, the process is done quickly and much faster than manually checking spreadsheets.
    • Error-free: Automation provides the precision necessary to quickly and easily detect any errors.
    • Confidence in your accounts: It ensures that your accounts are accurate and consistent, which helps you make important financial decisions.
    • Fraud reduction: It helps to detect and prevent fraud early by ensuring that the records match in real time.
    • Improved transparency: It gives a clear view of every transaction processed and provides better visibility of who is doing what and when.

    HighRadius Autonomous Accounting solution streamlines bank reconciliation.

    Speed up and improve account reconciliation and financial close with HighRadius’ Autonomous accounting solution that offers features such as:

    • Automated workflow: It creates account reconciliation project plans to assign specific general ledger (GL) accounts to R2R analysts or user groups for enhanced reconciliation.
    • AI-powered error detection: Identify potential errors to address before month-end reconciliation.
    • Faster reconciliation: Users can use standard templates or create their own reconciliation statements.
    • Auto-reconciling of data sets: Provide an existing set of matching rules or algorithms for reconciling any two sets of data (GL and subledger (SL) or GL and bank statement).
    • Collaborative workspace: Allow reconcilers to submit their work documents to the reviewer for approval and review.
    • Real-time visibility of task progress: It provides visibility to all stakeholders across the organization on the status of reconciliation and any necessary action that needs to be taken.

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    Frequently asked questions (FAQs) for bank reconciliation

    What is a journal entry for bank reconciliation?

    Journal entries are required in a bank reconciliation when there are adjustments to the balance per book. These adjustments are a result of items on the bank statement that haven’t been added up in the general ledger accounts of the business.

    Are undeposited checks reported as cash?

    Accountants define cash as more than just currency and coins. Undeposited checks that are not postdated (not dated with a future date) are reported as cash.

    How do you treat voided checks in bank transactions?

    Accounting software may allow you to go into a previous period’s (as well as the current period’s) activity and remove a voided check or change the amount to zero.

    How often should bank reconciliation be performed?

    Your bank balance might be off by several thousand dollars if you rely on monthly reconciliation, and those inaccuracies will only grow over time if you don’t fix them. Therefore, daily bank reconciliations are required to reduce the risk of fraud and other monetary irregularities. 

    What is the formula for bank reconciliation calculation?

    The formula for bank reconciliation is:

    Cash account balance per your records +/-  reconciling particulars = Bank statement balance.

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