Importance of Bank Reconciliation.Bank reconciliation is a critical financial process that ensures the accuracy and integrity of an organization’s financial records. It involves comparing and matching the transactions recorded in an organization’s books with the transactions reflected in its bank statements.
The importance of bank reconciliation can be summarized as follows:
- Detecting errors and discrepancies: Bank reconciliation helps identify errors, discrepancies, and fraudulent activities in an organization’s financial records. It ensures that the amounts recorded in the books match the amounts shown in the bank statements. Discrepancies can arise due to bank errors, transactional mistakes, or fraudulent activities such as unauthorized withdrawals or altered checks. By regularly reconciling bank accounts, these issues can be detected and resolved promptly.
- Ensuring accuracy of financial records: Bank reconciliation provides an opportunity to verify the accuracy of financial transactions recorded in an organization’s books. It ensures that all deposits, withdrawals, and other banking transactions are correctly entered and accounted for. By comparing the bank statement with the accounting records, any omissions or mistakes can be identified and rectified, leading to accurate financial reporting.
- Preventing overdrafts and fees: Reconciling bank accounts helps prevent overdrafts and associated fees. By reviewing the bank statement, an organization can identify outstanding checks, uncleared deposits, and other pending transactions that may affect the available balance. This information allows the organization to manage its cash flow effectively, avoid bouncing checks, and minimize bank charges.
- Managing cash flow: Bank reconciliation provides an up-to-date view of an organization’s cash position. By comparing the bank statement with the cash book, the organization can track its inflows and outflows of funds, ensuring that there are no discrepancies. This helps in monitoring and managing cash flow, ensuring that the organization has sufficient funds to meet its financial obligations.
- Facilitating financial analysis and decision-making: Accurate financial records are essential for making informed business decisions and conducting financial analysis. Bank reconciliation ensures that the financial statements reflect the true financial position of the organization. Reliable financial data enables management to analyze performance, assess profitability, and make sound strategic decisions based on accurate information.
- Enhancing internal controls: Bank reconciliation is a crucial control mechanism for organizations. It provides a means to monitor and validate the accuracy and completeness of financial transactions. By regularly reconciling bank accounts, organizations can strengthen their internal controls, minimize the risk of fraud, and ensure compliance with regulatory requirements.
In summary, bank reconciliation plays a vital role in maintaining accurate financial records, detecting errors and discrepancies, preventing financial losses, and facilitating informed decision-making. It is an essential process for any organization to ensure financial integrity and operational efficiency.
How does bank reconciliation benefit your SME?
Greater control of economic resources.
The bank reconciliation will allow you to check the veracity of the accounting information, so that you can have a more accurate picture of the economic situation of your SME.
Facilitates decision making.
The more information you have about the financial status of your company, the better decisions you can make. Bank account reconciliation will allow you to make strategic decisions based on reliable and up-to-date data.
Provides security upon inspection.
Bank reconciliation is not mandatory, but having up-to-date accounting and square accounts will make you feel safer in the face of an inspection because you will have already detected and corrected the errors or misalignments.
What types of bank reconciliation are there?
Individual conciliation.
Starting from the balance of the accounting books of the company, you must find the differences with the bank balance to make the necessary accounting adjustments and update the balance of the bank book, whose validity depends on the monthly operations being verified in the bank statement.
Joint conciliation.
A document is made with all the information about the entries that do not correspond to make the corrections, which will be in charge of the bank or the company, who is responsible for the errors.
How to reconcile a bank account?
Registers all the accounting movements that occur in the company’s bank accounts . One of the most important auxiliary books to carry out the bank account reconciliation is the bank book, in which you will only record the operations that you carry out with the banks you work with.
Check your bank book with the state of the accounts. From time to time, normally on a monthly basis, the bank will send you a statement of the account with all the movements registered. Banking entities are governed by rule 43 of the Spanish Banking Association, which regulates the characteristics of the file in which the movements of the current account are reflected and that you will use to carry out the bank reconciliation. You must confront those data with which you have written down to see if they coincide. If not, you will have to find the difference or the error.
It is not unusual for the balances to be different . The most common mistakes are duplicating a record or forgetting to post a movement. It is also common to make a mistake when placing a comma or reversing the order of the digits.
The difference is not always an error, in some cases it may be due to the application of a different accrual criterion. For example, the bank does not register an operation until it is posted, but as an SME it is possible that you have already reflected that activity in your accounting books. In those cases, you will only have to make an accounting entry to keep track of that difference.
Finally, it is worth clarifying that it is not worth establishing a conciliatory game and forgetting about the mismatch. If you accumulate conciliatory items, you will end up with an accounting that is far from the real situation of your SME and it will be increasingly difficult to balance the accounts .
