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November 6, 2024

Essentials of Accounting in an ERP: What is Bank Reconciliation ?

A bank reconciliation can bring to light the variations between the data contained in the bank records and those contained in the bank statement. Bank reconciliation can be yet another way to check if your financial records are correct. Given the increasing number of ways of doing and receiving payment, it is absolutely crucial to keep all those accounts balanced with one another. Apart from making certain that all matters connected to online payment systems are in place, it doesn’t really pertain only to a single bank account some companies operate accordingly. It also introduces its terminologies for managing cash and examples of new ways of treating money. Even with the continuously evolving modes of money handling, many companies are resuming traditional approaches and still depend on banks. Fortunately, the kind of investigation applied to bank accounts can also be exercised on the other accounts.

What is Bank Reconciliation?

The bank reconciliation depends on how a company compares the balances and transactions on their external bank statements with those recorded in the general ledger’s cash accounts, often referred to as a cash book. It helps most companies discover differences and then realign the two balances by allowing the accounting for unrecorded transactions like log and deposit delays or new bank fees. Bank reconciliation is critical for cash-flow management and is typically conducted through the accounting department or the business owner.

Why is it Important?

For many reasons, doing a regular bank reconciliation makes sense. Think about opening your account statement online, and expecting to see $100 in there. You see $50, but you’ve made no withdrawals or transfers. What do you automatically start doing? You go through all of your transactions for the past month, looking for where the $50 could have disappeared. Maybe you had forgotten about the lunch you’d paid for on one of your friend’s credit cards, or there was a banking error, but chances are you are making other determinations at this point. The same logic can be applied to the business scenario.

Bank reconciliation allows a business to check that the records on their book match those on the bank statement. Without reconciling, these differences can be utterly puzzling, uncovering missing transactions or excessive bank charges that aren’t accounted for.

A business that keeps up with regular bank reconciliation can expect benefits that include the following:

Accuracy: Increased accuracy in the financial records, as bank reconciliation will eliminate any errors that have been overlooked due to sheer human disregard.
Error Detection: Early detection of errors, before more discrepancies occur.
Fraud Prevention: Prevention of fraud occurring under the radar, like if a monthly payment has been ignored by someone with access to your data.
Cash Flow Management: Watch cash flow properly, and decrease your intensity of overdraft fees through faster management
Improved Financial Control: Good financial control over your business.

Beyond the Bank

Businesses in the early stage will do almost anything to make the most of a process that is somewhat daunting at first. DO NOT just reconcile the bank account – begin by reconciling anything and everything that holds a financial account balance. Your point of sale and purchasing systems, PayPal, Stripe – you name it. Bank reconciliation is the same, no matter where the source is – it comes down to comparing your records to the actual activity and making sure that everything is right. Regularly, your company will be able to:

Find and correct mistakes
Detect and prevent fraud
Ensure the accuracy of financial records
Keep track of your cash balance

Bank reconciliation should just be considered looking at everything financial for your company – like a combination of going to the doctor and pulling out the junk drawer.

Bank Reconciliation Explained for Accurate Cash Management

The cash balance that a company shows in its books does not frequently match the actual cash balance in its bank account or other financial services. Various reasons cause these differences, including timing problems with normal business functions, clerical mistakes, or potential dishonesty. Such differences are reconciled and aligned in bank reconciliation so that they can show a true financial picture of the cash of the company.

Bank reconciliation is an indispensable process in cash-flow management and has a big role in establishing internal controls. With regular bank reconciliations, the business can take error control measures, ensure the maintenance of proper financial records, and foil fraud. Understanding and successfully employing this important process ensures healthy cash flow and reliable financial statements.

Why is it essential for businesses to undertake Bank Reconciliation?

Clear Picture of Assets: A business needs to know exactly how much money it has available. Bank reconciliation will give you a complete picture of your cash position. You can, therefore, make informed decisions on spending commitments and investments.
Confident Decision-Making: Using outdated or incomplete financial information can lead to costly mistakes. Bank reconciliation ensures that you are receiving the information needed and thus can make confident decisions on spending, hiring, and strategic investments.
Fraud Awareness: Well aspects of the information carried will allow one to recognize suspicious activity quickly or unaccounted transactions that would save the business from loss of money.
Accounts Receivable Managing: Regular bank reconciliation facilitates the identification of issues concerning unpaid invoices or other accounts receivable that can be addressed before they lead to severe cash flow issues.

Reconciliation also contributes to:

Increased Efficiency: High secrets ensure better processes within finances concerning their running and movement.
Strengthened Internal Controls: Fortified financial oversight and reduced risk of fraud.
Better Financial Planning: A strong guide to build a budget and forecast.
Increased transparency: Ensures your financial records are accurate and trustworthy.

Bank reconciliation is not just a routine task, but a vital process that safeguards your finances strengthens your operations, and contributes to the overall success of your business.

Bank Reconciliation: Who’s in Charge and How Does it Work?

This process is important for keeping reliable and smooth financial records, but who is supposed to carry this heavy burden? And what does it comprise? Following is the clarification:

Who Oversees Bank Reconciliation?

In big corporations, the responsibility for the complete bank reconciliation process usually falls on one of the accounting managers. Generally, the head of the accounting department controller manages the bank reconciliation operation and gives it the proper feel. Actual reconciliation work is normally carried out by the staff accountant, following the principle of segregation of duties (where two or more independent people accomplish different functions of such work).

In small businesses, the owner or the bookkeeper may directly do bank reconciliations themselves.

The 3-Step Bank Reconciliation Process:

Compare: First, compare your company’s internal cash records, called cash books, with your external bank statement. In the initial phase, your two balances will seldom be the same, owing to timing differences, outstanding transactions, and bank fees.
Adjust: Then, adjustments will be necessary for both balances based on mismatches. This includes transactions appearing on one statement but not the other, for example, deposits in transit, outstanding checks, or bank charges.
Record: Finally, the cash account is adjusted in the company’s general ledger to show the reconciled balance. The bank balance will adjust automatically when the outstanding transactions are cleared.

Understanding Key Terms in the Bank Reconciliation Process

Bank reconciliation can sometimes feel like looking for a needle in a haystack. Worry, however. This is to apprise you of some of the common terms you would hear while doing this important task.

Outstanding checks: An outstanding check is used to say that the payment is in a state of scribal uncertainty. This may be a check that you have received but deposited late or a check that you have written but which was yet to be cashed by the recipient. It could have created temporary differences between your records and your bank balances.
NSF Check (or in easier terms “Bounced” Check): An NSF check (non-sufficient funds) is like a boomerang; it returns to you because they don’t have enough on their account to cover it. This causes a variety of discrepancies in your record because you originally recorded it as a payment but later on have to reverse that recording.
Deposit in Transit: Imagine that you are making your check deposit at the close of business. The funds may not be available in your account until the next business day or later. That is a deposit in transit; it is on its way but is not processed yet by the bank. This may happen due to cash deposits or payments being delayed due to some reason.

Why These Terms Matter:

Understanding these terms helps you:

Know why and how: Find reasons why an item on your records may not concur with the item on the bank statement.
Make a proper adjustment: Correctly update your records so that they show how much cash you actually have and do not.
Prevent errors: Don t make mistakes in recording and reconciling transactions.
Make this area more efficient: Streamline the whole bank reconciliation.

Mastering Bank Reconciliation: A Step-by-Step Guide for Accurate Accounting

Bank reconciliation is a necessary feature for businesses of every size. It provides checks to verify that internal financial records balance with the actual bank balance to avoid mistakes, and fraud, and give a big picture of cash flow.

Here’s a step-by-step guide to mastering bank reconciliation:

Balance Comparison: First of all, check the ending balance of the bank statement to that of the cash account (the “cash book”) within the books of account. They are unlikely to match the first time outside your surprise!
Review Bank Statement: Examine the bank statement to see whether any transactions are not listed in your cash book. Some examples include bank fees, interest earnings, or any payments that were supposed to come out of your account automatically.
Look into Cash Book: Now check your cash book to see whether some kind of activity not yet reflected in the bank statement might have taken place. This might consist of checks one hasn’t cashed, deposits that remain to be cleared, or recent payments not fully completed.
Bank Balance Adjustment: Considering those outstanding transactions, check how your bank balance is expected to change with the forthcoming transactions cleared off.
Cash Book Adjustment: Adjust your company’s cashbook account by any entries in the bank statement that were not drawn on before, whether it be bank chasers or money installments.
Record Reconciliation: Prepare a small note of the reconciliation process. It can either be a simple note in the cash book or a bank reconciliation statement documenting items and the reason for each discrepancy in detail.

Benefits of Bank Reconciliation

Bank reconciliation constitutes a basic portion of determining that the financial records of the business exactly match the actual bank balance. It may be conceived as a financial checkup to ensure that your books and your bank are in perfect harmony.

Verify Customer Receipts: Bank reconciliation assures that customer payments have cleared and are in the account, allowing you to keep your cash flowing for operations and growth.
Safe Accounting: Whether you are doing your business using accrual accounting GAAP requires) or cash accounting, bank reconciliation is very important for keeping good records and accurate financial statements.
Catch Mistakes: Mistakes will occur!! Bank reconciliation aids in the detection of errors in your records or on your bank statement before they become bigger problems.
Spot Cash Flow Troubles: By regularly conducting bank reconciliation, you get to understand the state of your cash flow this helps you to catch potential problems in advance.

Challenges in Bank Reconciliation

Several typical problems can occur while doing bank reconciliation understanding will make the process less painful.

Uncleared Checks: Uncleared checks are those that have not been processed by the bank and can thus create minor discrepancies.
Voided Checks Clearing: Occasionally, a voided check may clear; if this happens, there will need to be an adjustment recorded.
Returned Checks: Bounced checks need to be entered into the accounts for insufficient funds or anything else.
Bank Charges: Unanticipated bank charges may cause a difference between your records and the statement.
Interest Income: Interest earned on your account must also be recorded appropriately.

Best Practices for Setting up a Successful Bank Reconciliation Process

Bank reconciliation is important to keep the records fairly accurate and the cash flow in very good condition. But how often should one reconcile? And what are the best practices for a fast and effective reconciliation?

1. Fix a Schedule

When it comes to bank reconciliation, consistency plays a very big role. Don’t allow it to become overwhelming by doing it on the pile once in a blue moon. So, fixing a regular schedule month, week, or even daily for high-volume businesses will keep your finger on the pulse of your finances.

Why does this matter?

Timely Error Detection: Regular reconciliation enables you to catch errors and discrepancies quickly to avoid these from snowballing into larger problems.
Cash flow management: Closely tracking your cash position also allows you to identify a cash flow problem, resulting from any mismanagement, in its nascent stage and proactively take remedial or preventative measures.
Less Stress: Well-scheduled reconciliation avoids backlogging, hence easing the stress of managing finances.

2. Simplify Your Accounts

If you hold accounts with minimal transaction activity, hinting at monthly balances, go ahead and consolidate those accounts. Hence, transactions will become less frequent when reconciling.

3. Adopt Technology

As different technologies for succeeding in business rise in sophistication, reconciliation tends to get tricky and time-consuming. The good thing, however, is technology steps in to help. Cutting-edge accounting software comes with features that:

Automate data entry and matching: Decreases manual input to reduce the chances of errors.
Allow real-time visibility: Provide you access to cash flow and help to quickly identify discrepancies.
Generate reconciliation reports: Provide all the details you require to ease the interpretation of formulated reports and make a permanent record.
Integrate with online banking: Connects directly to your bank account for seamless data import and reconciliation.

Streamline Bank Reconciliation with Versa Cloud ERP

Bank reconciliation can become time-consuming for businesses when dealing with high transaction volumes, multiple bank accounts, or even various currencies. But there is a better way!

Versa Cloud ERP features are the right tools to boost financial accounting in a business while establishing efficient bank reconciliation processes that would save time and be more accurate.

With Versa Cloud ERP, here are the ways on how it eases the burden of bank reconciliations:

Automatic Data Imports: Say goodbye to manual data input! This means your finance team will not be troubled with errors and other petty issues due to the automatic importing of bank data into Versa Cloud ERP.
Intelligent Matching: The system intelligently matches transactions between your bank statement and your accounting records, making reconciliation child play.
Visibility in Real-Time: Here you have an instant view of your cash position, and discrepancies can be notoriously spotted.
Multi-entity Harmonization: Reconcile accounts across multiple entities or subsidiaries with effortless ease.