What is the Importance of Bank Reconciliation?
Running a small business or limited company requires dedication, hard work, and business management skills. You must know accounting and bookkeeping procedures before starting a business. Moreover, there should be a strategy to help you have a clear idea of the cash flow in your limited company. For this, bank reconciliation is the procedure. This article will help you have an idea of the procedure and the importance of bank reconciliation.
Talk to one of our intelligent and clever professional bookkeepers to get your further queries about bookkeeping services in London. We will ensure to come up with the best possible solution for you.
What Does Bank Reconciliation Involve?
Bank reconciliation involves the comparison of the bank statement of a company with its account office records. The comparison is done in the following steps:
- Get the bank statement from the bank at the end of the accounting period.
- Get the company account office records along with all the documented proofs and receipts of transactions.
- Adjust the bank statement balance.
- Adjust the company account balance.
- The balances at the end of both records should be the same.
How are Balances Adjusted in Bank Reconciliation?
The balances are adjusted by:
- Deducting bank fee charges from bank statements. This is because the fee charges are not included in the company account office records.
- Deducting outstanding cheques. These are the cheques that are not cleared up by the bank due to insufficient or low balances in the issuer’s account.
- Adding in-transit amounts to the bank statement. In-transit deposits are the amounts that are in the process of transfer and are yet to be processed by the bank.
Visit our more detailed guide on what is bank reconciliation, we have covered in-depth knowledge of bank reconciliation over there.
What is the Importance of Bank Reconciliation?
Moreover, bank reconciliation is crucial in the growth of business because of the following reasons:
1- Accuracy
The bank statement and company account office records are matched for any transaction it has made throughout the financial year. The bank reconciliation compares the date and amount of the transaction. If the amounts are the same, the records are accurate, and if the transaction doesn’t match, the accountants need to make adjustments and look for human errors.
2- Fraud detection
The comparison of records allows fraud detection. If the bank entry and the office entry do not match, the accountants make necessary adjustments such as deducting outstanding cheques, adding in-transit amounts to the bank statement, and deducting bank fee charges. If after all the adjustments the records still have different balances, this indicates some fraud activity carried out by the company staff.
3- Cash flow management
The bank reconciliation procedure helps with smooth cash flow in the internal and external dealings of the company. Efficient cash flow management builds strong client and company relationships and motivates company employees to work with dedication for the company.
4- Error identification
The bank reconciliation helps with error identification in the company records. It shows how efficiently your accounts office staff is working; however, errors can always be there in the bank statement. The reconciliation allows for the identification of error types, for example, if there are more outstanding cheques or in-transit amounts for a difference in the balance of both records and there are incorrect entries from the accounts office staff.
5- Strategy development
The bank reconciliation procedure concludes whether the company’s accounting policy and office management policies are contributing to the growth of the company. If there are many errors in reconciliation, then this indicates that the company needs to replan staff, management, and cash flow management strategies. Bank reconciliation allows risk prediction if the balance outcome is not according to the predicted estimate.
6- Compliance
The bank reconciliation should be done periodically. The bank reconciliation is set by the company. It can be done weekly, monthly, or on a regular basis. The limited company must make sure that the reconciliation length is not greater than 12 months. The periodic conduct of bank reconciliation at set times makes sure that the company complies with the rules and regulations of HMRC and the Companies House.
7- Automated bank reconciliation
The automated bank reconciliation is fast and accurate. Moreover, companies can buy subscriptions to bank reconciliation software and use it for a set period. Automated bank reconciliation does not imply fee charges, unlike hiring an accountant. The software is developed for error-free entry and updating of company transaction history. The accounting software is linked with the company bank account, and all the updates in the company account are automatically updated on the bank reconciliation software. Additionally, the bank reconciliation software is proactive and free, since it only requires one to be subscribed; the rest is done and updated by the software.
Conclusion
Bank reconciliation is the procedure of comparing bank statements with the record on the company account register. The bank reconciliation procedure consists of a few steps, but the steps should be done vigilantly by the company accountants or those hired by the individual for bank reconciliation at the end of the financial year. Get in touch with one of our professionals to learn. more.
Disclaimer: All the information provided in this article on the importance of bank reconciliation, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.