Bank Reconciliation Statement and its Importance

Bank Reconciliations aren’t fun, but they shield you from a variety of pitfalls, such as overdrawing your account and being a victim of fraud, if you do them regularly.

What is a bank reconciliation statement?

bank reconciliation statement aligns an entity’s bank account with its financial statements by summarising banking, net banking, and business operations. Payments have been collected, and cash collections have been deposited into a bank account, according to bank reconciliation statements.

You “reconcile” your bank statement by comparing it to your bookkeeping records for the same period and identifying any discrepancies. Then you keep track of the differences so that you or your accountant can be sure no money has gone “missing” from your business. The function of a bank reconciliation statement is to align an entity’s bank account with its financial statements.

Who is responsible for bank reconciliation?

If you do your bookkeeping, you should plan on reconciling your bank statements regularly (more on that below). If you hire a bookkeeper or use an online bookkeeping service on e-banking, they’ll take care of it.

If you use the accrual form of accounting, you just need to reconcile bank statements. If you use cash basis accounting, on the other hand, you report every transaction at the same time the bank does, ensuring that the books and bank statements are in sync.

There’s always someone checking to make sure every number adds up and the books fit really in large corporations of full-time accountants. This is normally the owner’s duty in a small business.

5 Important Reasons Why Bank Reconciliation Highly Matter

Bank reconciliations are time-consuming, but financial hygiene will pay off in the long run. Here are some of the reasons why you should do them.

1. Accept Your Business As It Is

When you look at your books, you want to know that they are correct. If your bank account and books don’t fit, you could end up spending money you don’t have—or holding on to cash you should be investing in your business.

2. Track Cash Flow 

Managing cash flow is an important aspect of running a company. You can see the connection between when money enters your business and when it enters your bank account by reconciling your bank statements, and schedule how you raise and spend money accordingly.

3. Detect Fraud

A bank reconciliation statement will not prevent fraud, but it will alert you to the fact that it has occurred. You might, for example, pay a vendor by check, but they could tamper with it and increase the amount withdrawn before cashing it. When you reconcile your bank account, the difference will turn up.

Alternatively, you and your business partner may have a joint account. They can take more than they report on the books when they withdraw money from your account to pay for a business expense. When you reconcile your bank statement, you’ll note this.

Hopefully, you’ll never have to worry about fraud, but reconciling your bank statements is one way to ensure that it doesn’t arise.

4. Detect Bank Errors 

It’s rare, but the bank will sometimes make a mistake. If you can’t understand a difference in your accounts any other way, it’s time to talk to someone at the bank.

5. Mark And Identify Your Account Receivables

When you complete an assignment and the client says, “The cheque will be mailed today, I promise!” you can “debit” your cash account if you use the accrual method of accounting. And, a month later, you do your bank reconciliation and discover that the cheque never arrived, and the money isn’t in your accounts(Even though your accounting indicates you were paid)

Bank reconciliations act as a safety net to ensure that your receivables never spiral out of reach. And if you see a consistent difference in accounts receivable between your books and your bank, you realize you have a more serious problem to address.

The above-stated 5 indications are as much as important in bookkeeping. 

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