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

What you’ll learn

  • What is bank reconciliation and why is it important in accounting?
  • Benefits of bank reconciliation and uses of a bank reconciliation statement
  • Need for automation in the bank reconciliation process

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 an important process in accounting in which organizations match their bank statements with the transactions that are recorded in their general ledger. Preparing a bank reconciliation statement helps businesses to eliminate possible errors in transactions or bookkeeping.

Before digging deeper into the methods of bank reconciliation or the loopholes experienced by the accounting teams, let us first understand the basic terminologies that are used in bank reconciliation.

What is the Difference Between Cashbook and Bank reconciliation?

The difference between cash book and bank statement balance is that cash book balance indicates the transactions added on the organization’s general ledger while the bank statement balance indicates the cash balance on the bank statement.

What is the Importance of Bank Reconciliation in Accounting?

Bank reconciliation is important because it helps organizations identify possible errors in transactions that lead to a difference between the accounting records and the bank statement. A bank reconciliation statement also helps to identify potential fraudulent activities to safeguard the business against losses.

Bank reconciliation ensures that your business’ cash balance is what you thought it is. If your book balance is different from the bank balance, your accounting team needs to sit down and thoroughly analyze both the records to eliminate the anomalies.

These few reasons highlight why frequent bank reconciliations should be mandated:

  • Bank reconciliation ensures accurate transactions and posting on general ledger.
  • Bank reconciliation helps in identifying and avoiding frauds before it is too late
  • Bank reconciliation statement is used to identify possible delay in check clearances

How Often Should Bank Reconciliation be Performed?

Bank reconciliations should happen on a daily basis to eliminate any possibilities of frauds or financial irregularities. Usually, organizations reconcile the statement once a month. Monthly reconciliations might lead to a lot of anomalies in your bank balance and book balance, and it will keep piling up. That’s why bank reconciliation statements should be prepared accurately on a daily basis.

How to Prepare a Bank Reconciliation Statement?

Across the industries, these two popular methods are used to prepare a bank reconciliation statement:

  • Subtraction and Addition Rules
  • Credit and Debit method

Finance and accounting teams usually go through the following steps to prepare a bank reconciliation statement:

Step-1: Compare the bank statement with the general ledger

Step-2: Adjust the bank statement

Step-3: Adjust the cash balance

Step-4: Compare the balances and Add Journal Entries if Required

Now, the question arises:

What is a Journal Entry for Bank Reconciliation?

A journal entry represents the data that needs to be added to a company’s general ledger while performing bank reconciliation. This is because these data entries were present on the bank statement but not on the general ledger. A few examples of journal entries include bank interests, loan payments etc.

To understand the step-by-step guidelines on how to prepare a bank reconciliation statement from scratch, read our blog on ‘A Beginner’s Guide to a Bank Reconciliation Statement Preparation’.

What is the Formula for Bank Reconciliation Calculation?

The formula for bank reconciliation is:

(Cash account balance per your records) addition or subtraction ( reconciling particulars) = (Bank statement balance).

Let’s consider a real-life example of a bank reconciliation statement:

What is the Formula for Bank Reconciliation Calculation

What are the Challenges Encountered While Reconciling Bank Statements?

Bank reconciliation is critical and there are multiple uses of a bank reconciliation statement. However, reconciling statements manually on a daily basis can turn out to be challenging. Let’s explore a few real-life challenges experienced by the organizations across the world:

1. Slow Process of Data Input

Analysts have to manually log into banking systems to pull bank statements, access the ERP system to analyze and match it with the cash balance. Doing this recurring activity could turn out to be a slow process due to the high manual intervention involved.

2. Possibilities of Error-Prone Reconciliation

There are higher possibilities of human errors while reconciling manually. This does not serve the purpose of improving the accuracy of transactions.

3. Lack of a Central System for Auditing

After the reconciliation statement is prepared, it is important to store the bank reconciliation statement for auditing purposes. If reconciliation is paper-based, in that case, maintaining the audit trail can turn out to be tricky.

Why is Automation Required in Bank Reconciliation?

To ensure higher accuracy rates, organizations are slowly pivoting towards automation in the accounting process. Automation will rule out the possibilities of any manual errors while inputting the data, and reconciling the statement.

Let us understand how automation would impact reconciliation and what is a bank reconciliation software or a bank reconciliation application?
A Bank Reconciliation Software is a cloud-based solution that automates the process of bank reconciliation. With automation, your finance teams can access real-time balances from the general ledger, carry over information and open items from previous periods, and make comparisons from bank statements and invoices using the software. The accounting team can then sign these account reconciliations electronically before sending them to a reviewer for approval. The data can be retained in the software’s database as an audit trail once it has been approved.

What are the Benefits of Bank Reconciliation Software?

1. Fully Automated and Efficient

A lot of financial teams spend the majority of their time entering data, trying to understand inconsistencies, and wasting time on manual and repetitive tasks. Bank reconciliation application automates the process, enabling your team to focus on higher-level duties while improving accuracy and insights, tightening controls, and reducing audit risks.

2. Improved Internal Controls and Less Errors

Bank Reconciliation Software Application increases internal controls by allowing organizations to see how the process works and feel confident that it is always running smoothly. It also prevents any activities that aren’t part of the process, and alerts may be set up for any unusual changes or activities. By reducing manual human inputs and adopting automatic mapping, you may reduce errors. Automation helps in preventing many potentially costly errors, and also alerts will be given to spot problems as they arise in real-time.

3. Higher Transparency and Audit Trail

The software saves all data history and reconciliations. This is useful for both audit trials and compliance, as well as historical data. You may utilize this record to find out how much something used to cost in the past, which might help you budget for future expenses. This helps you to better budget and manage the finances of your organization.

4. Delegated Responsibilities

You may assign responsibilities and manage access controls with reconciliation software. As a consequence, everyone in your accounting team understands their responsibilities and roles. When a reconciliation requires approval, the system assigns the next step to the relevant approver automatically.

Automation in bank reconciliation would help your teams stay on top of their cash balance with 100% accuracy. Click here and get a free demo of the bank reconciliation software application today!

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