Whenever we calculate our cash reserves, we include the money in our bank account and the money that has been earned but is yet to be deposited. The same happens with companies but on a relatively large scale.
Some cheques and payments might take some time to reflect in your bank account statements (deposits in transit). During this period, the cash balance shown on the bank statement is more or less than what is present in the balance.
Such discrepancies can hamper the decision-making prowess of the upper management and prevent your accountants from formulating cohesive financial strategies. A simple bank reconciliation statement should fill the gap and keep all the key personnel up-to-date with the latest cash figures. In this blog, we have comprehensively covered what is bank reconciliation and how to automate it.
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What is Bank Reconciliation Statement?
A bank reconciliation statement summarizes all your business and transactional activity, including cash account and bank account. This document compares the cash balance on the balance sheet with the money in the bank statement.
The comparison may yield a difference between the two balances—cash balance and bank balance. This happens due to various reasons like accounting errors, deposits in transit, delay in deposit, in-house mistakes, hidden charges, or fraud.
Bank reconciliation statements are paramount for maintaining the company’s financial health and ensuring that all the payments have been processed and all the cash has been collected. It’s best to initiate your bank reconciliation process whenever you receive your bank statement.
Again, bank reconciliation statements help the company identify financial leakages or areas where cash flow is obstructed. This is to make relevant changes in the bank account and cash account to prevent unfavorable circumstances in the future.
What are the Different Types of Bank Reconciliation Statements?
Bank reconciliation statement is one of five statements under the umbrella term of Account reconciliation statements. Here are 4 other types of reconciliation statements to help you better understand the process.
Vendor Reconciliation
During the vendor reconciliation process, the accountants compare the accounts payable records and measure them against the payment reports your vendors and suppliers sent in. You may face some challenges during the process, as some vendors might be reluctant to share these reports.
But ensuring that accounts are in sync builds more trust with vendors and suppliers. Strengthening your relationship with your vendors will enable you to get better bulk discounts and shorter payment cycles.
Business-specific reconciliation
Business-specific reconciliation statements are among the more demanding reconciliation statements on this list. The process includes comparing the internal transaction records of the company at the beginning and end of each financial cycle. Sometimes, the statement is used not to measure the financial inconsistencies but the variations between the goods and services dispatched during the period.
The conditions and parameters for business-specific reconciliation vary from organization to organization. For example, business-specific reconciliation for investment firms includes reconciling the cash balance of client-owned funds and the recent investments done with that money.
Intercompany reconciliation
Intercompany reconciliations are mostly undertaken by holding companies to consolidate the accounts of all the subsidiary companies. Intercompany reconciliation aims to look for disparities that may have risen due to delays in payment processing, deposits, or other loan repayment activities.
Once identified, these errors can be easily rectified in all the balance sheets. An intercompany reconciliation makes the relationship between the subsidiary and the parent company more transparent for the stakeholders.
Customer reconciliation
These statements are only prevalent for companies that offer their services and products on credit. The accountants are required to compare the accounts receivable ledger with the to-be-received amount. Customer reconciliation statements are often prepared towards the end of the month as a key element of the account closing process to prevent bank balance and cash balances from reflecting misleading financial position
How to Prepare a Bank Reconciliation Statement?
Depending on the type of account reconciliation statement, the complexity of the process might vary. But the process is comparatively simple for bank reconciliation statements, albeit a bit lengthy.
Step 1: Begin by analyzing the opening balances in your cash book and bank statement. As mentioned earlier, there might be differences in the closing and opening balance due to deposits in transit or undeposited cheques from previous financial cycles.
Step 2: Next step involves the scrutiny of the bank statement and the cash book. For the first part, compare the cash book’s debit side bank column and the credit side of the bank statement. Following that, compare the credit side of the cash book with the debit side of the bank statement.
Step 3: Highlight all the common items on both sides of the bank statement.
Step 4: Look for the entries that might have been missed during the defined period. Again, highlight these entries and make the necessary changes in accounting records to ensure the tally of the cash book and bank statement matches.
Step 5: After correcting these mistakes in the cash book, calculate the new revised balance in the bank account balance column in the book. Completing this step prepares the stage for the main process of reconciliation.
Step 6: First, subtract the un-credited cheques as the amount is yet to be reflected in the business bank account even though the cheque has been deposited in the bank. Similarly, add the un-presented cheques as they have been issued to the suppliers, but they have not redeemed them.
Step 7: Make necessary adjusting entries to remove the bank errors and arrive at the adjusted bank balance. And repeat the same process of filling in the gaps and reversing the erroneous transactions.
Step 8: The final figure in the cash account must equal the figure in the bank statement.
What are the Benefits of a Bank Reconciliation Statement?
We now move on to the four major benefits of bank reconciliation statements. These are also the reasons you must invest in increasing the efficiency of your bank reconciliation process. But remember that bank reconciliation statements are mandatory for companies irrespective of their benefits and drawbacks.
Prevention of mistake
To err is human; the same holds true for accountants. Even the most experienced and professional accountants can make marginal errors in the bank statement section and cash account during the normal bookkeeping procedure. Errors of commission, omission, missed payments, double payments, normal calculation errors, and misplaced cheques are common mistakes accountants may commit.
Bank reconciliation statements give them a second chance to right their wrongs before submitting monthly finance reports.
Identification of fraud
As you can see above, bank reconciliation statements help accountants review the financial statements multiple times to find any inconsistencies. Consequently, it becomes easier to notice when things do not square up.
These divergences in the cash account and bank statement balance are mostly due to simple errors of omission or mathematical errors. But sometimes, accountants can stumble upon illegal bank transactions, within the company, for swindling money from the organization.
Maintains the financial health of your account
When accountants regularly peruse the company’s financial statements, they are less likely to overshoot the budget or miss any crucial payments. This increases the financial reputation of the company by preserving its credit score. Maintaining financial health also entails preventing the company from overdrawing and incurring unnecessary charges.
As a result, frequent bank reconciliation statements also help the organization save money by curtailing overdraft charges as bank service fees. Moreover, bank reconciliation statements make it easier to notice whether your bank charges you extra bank fees.
Used for tracking payments
Even though digital payments have taken over, some customers and clients still prefer making payments through cheques. So, a high risk of misplacing these cheques still exists in organizations.
A thorough bank reconciliation statement will help you quickly notice these misplaced leaflets. After confirming its disappearance with the bank, you can request your customer to issue a new one in your favor.
It’s critical to note that you can only leverage these benefits when your bank statement reconciliation procedure is correct and efficient. Automation does that for you.
How to Automate Bank Reconciliation for your Business?
Manually reconciling bank statements takes a long time. In fact, bank statement reconciliation can take up to a few days at the end of the month. First, you have to prepare your documents and bank records. Following this, you have to prepare a plan of action before going through your different bank accounts.
You also have to check the income in your cash registers. Finally, you must verify your company’s cash records and measure them against your expenses to verify your end balance. While experienced professionals can do all of this efficiently, we simply cannot match the efficiency of a software.
With simple bank reconciliations software or bank reconciliation apps, you can finish a few days’ work within a few hours. Accounting software companies are developing advanced solutions to help financial professionals reach their full potential. And contrary to popular belief, bank reconciliation software would not replace accountants. It is rather known to enhance productivity and enable accountants to focus on more important functions.
Powerful bank reconciliations software can automatically dispatch duties without any additional guidance. The matching of the figures and the difference in cash account records or bank errors will also be highlighted, along with possible reasons. Introducing such software in your organization will massively improve the quality of your bank reconciliation statements. In addition, the bank statements can be instantly imported along with all the annexures.
Automated bank reconciliations software is worth its weight in gold for larger organizations. This is because the software automatically creates reconciling statements and improves the surveillance of multiple bank accounts within the same company.
Example of Bank Reconciliation Statement
Here are simple examples to help you better understand the bank reconciliation process.
Bank reconciliation example #1
First, let’s try understanding bank reconciliation statements with a simple example before moving on to more complex ones. Say, the ending balance of business accounts for a month-end was $400,000 for a company. However, the bank statement shows liquidity of $397,000.
So, now, you have to start the reconciliation process of comparing the credit side balance of bank statements with the debit side bank balance in your cash ledger. In doing so, the company identifies a $3000 cheque that was deposited but not yet processed at the bank’s end.
Finally, you must deduct the amount from your cash balance as to-be-received credit cash to reconcile bank statements. Fairly easy, right? Let’s move on to the next.
Bank reconciliation example #2
Now that your neurons are firing, let’s take another example.
During the period, a company’s bank accounts for the accrued interest income of $500. The bank charged for annual maintenance and surcharges to the tune of $100 for each. Lastly, the ending balance for the month is $5000. A bank reconciliation statement to bridge this gap would look like this.
| Description | Amount |
|---|---|
| Closing Balance | $5000 |
| Add: Interest Income | $500 |
| Less: Bank Maintenance Charges | $100 |
| Less: Surcharges | $100 |
| Bank Closing balance | $5700 |
Bank reconciliation example #3
For the last example, let’s consider a company X that closes with an account balance of $170000. But the bank account had a closing balance of $180000. To analyze this difference, let’s look at the company’s income and expense reports.
| Description | Amount |
|---|---|
| Opening Balance | $15000 |
| Amount generated from clients | $130000 |
| Expenses paid for client services | ($100000) |
| Salaries accrued | ($20000) |
| Accounts receivable | $10000 |
| Closing balance | $170000 |
As for the bank statement
| Description | Amount |
|---|---|
| Opening Balance | $150000 |
| Account Credits | $130000 |
| Account Debits | ($100000) |
| Closing Balance | $180000 |
As you can see, provisions created for accounts receivables and salary account cannot be shown on the bank statement as these bank transactions have not been made. So, deducting these amounts should reconcile bank statements.
Final Thoughts
By this point, you must have realized bank reconciliation meaning and that the manual bank statement reconciliation procedure can be mundane. The traditional method to reconcile bank statements uses redundant techniques and yields more errors in bank and cash balances than results. With the advent of technology, bank reconciliation statements can be done within a few hours with laser-sharp accuracy while effortlessly maintaining business records for future reference.
In the long run, the company will cover the cost of the software and eventually increase its ROI. While the software does not generate any revenue, it more than makes up for it by saving precious person-hours in correcting the bank’s ending cash balance, calculating interest income and more tedious tasks. So, you should consider getting automated bank reconciliation software to reconcile bank statements and scale your company while monitoring your company’s ending cash balance and bank’s records.
Frequently Asked Questions
The proprietor often creates bank reconciliation statements in smaller firms. In the case of massive conglomerates, the accounting department creates the bank reconciliation statement.
You can reconcile your entity's bank account anytime during a given financial period. But mostly, the bank reconciliation statements are created towards the end of the month.
Reconciling multiple bank statements involves the same steps as reconciling a single bank account. The only difference is that you must review multiple bank account statements to locate the errors. As a result, it is recommended to use automated bank reconciliation software when dealing with multiple bank statements.
Amaey Anand is a certified accountant with over 10 years of experience in the finance industry. He has worked with various organizations to streamline their petty cash management processes and reduce inefficiencies. He has also written several articles on financial management for leading publications such as Zensuggest and The Wall Street Journal.
