Explained: Need for Bank Reconciliation

Reconciliation is the process of comparing transactions that have been recorded internally against monthly statements from external sources like banks to see if there are differences in the records and to correct any discrepancies. Further, reconciliation involves resolving any discrepancies that may have been discovered.

Need for the reconciliation:

Companies perform bank reconciliation to ensure their financial records match their bank statements. This process helps to confirm the following:

Accuracy

Bank reconciliation helps companies identify errors in their records or the bank’s statements. It helps the company ensure the accuracy of financial records by identifying and correcting discrepancies.  

Fraud detection

Unexplained discrepancies between records can indicate fraud. For example, a deposit in transit that remains on the reconciliation for much longer than it should could be a sign of fraud.  An employee pays personal bills and credit card accounts with organization funds using valid business names as vendors, but the irregular transactions never have official business purposes. Regularly reconciling accounts helps detect and prevent fraudulent activities by identifying any unusual transactions or inconsistencies.

Financial control

The process of bank reconciliation tightens internal controls by instituting a routine check and balance system that reduces the probability of fraud and error within the organization. Bank reconciliation helps companies better control cash and manage their finances by ensuring all transactions are accurately recorded.  

Compliance

Bank reconciliation identifies errors in both the company’s records and the bank’s statements, ensuring all transactions are accurately recorded. It ensures compliance with regulatory and audit requirements, providing detailed and accurate financial statements.  

Cash flow management

Bank reconciliation helps companies manage cash flow by providing a clear picture of available funds and financial health.  

Tracking

Bank reconciliation helps companies track interest and fees, especially when banks add penalties or charges to their account.

 Tracking receivables

Insufficient funds in the account may cause bounced cheques that may damage the reputation of the company and lead to an unsavoury relationship between the company and its customers. Bank reconciliation helps companies confirm their receipts and identify the ones they have not deposited.

Detects Errors

A bank reconciliation statement helps to locate errors. After locating errors, firms can easily remove them.

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