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What is meant by a Statement of Reconciliation for the Bank?

Close-up shot of a chief finance officer reviewing the company's financial chart documents.

A statement of bank reconciliation is a description of an entity's banking and business activities that is used to reconcile the bank account of the firm with its financial records. A statement will include not only the deposits and withdrawals made to a bank account but also any other transactions that occurred within a certain time frame. Bank reconciliation statements are an important piece of financial internal control that can be used to prevent fraud.

The completion of both the processing of payments and the depositing of cash collections into the bank is validated by the use of bank reconciliation statements. The bank and the book balance are compared using the reconciliation statement, which assists in locating any discrepancies between the two and enables the processing of any required modifications or repairs. In most cases, a monthly processing of reconciliation statements is performed by accountants, or you can also hire bookkeeping and accounting services to help you.

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How to Perform a Bank Reconciliation?

For a successful bank reconciliation, you will need the bank statements for the current month and the prior month, as well as your business ledger. There are several templates accessible online that may assist you, however a simple worksheet can do the job just as well.

  • Begin with the balance that you had at the end of the previous month. That number will serve as your starting point.
  • Add either any amount that has been made but has not yet been cleared or subtract any checks that are still being processed. This is your cash balance after adjustments have been made.
  • Add any interest that was earned or subtract any fines, NSF checks, or fines that might not have been reported in your company's financial records. After you have your updated cash amount, you may now do any of these things.
  • Verify that the quantities of your cleared deposits and checks match the bank's records. After this step, the final balance should remain the same.
  • If there are inconsistencies, you need to conduct an investigation to see what could have been overlooked in your recording or what mistakes might have been made by the bank.

Professional doing bank financial transactions.

What Is the Purpose of Creating a Bank Reconciliation Statement?

The purpose of a bank reconciliation is to verify your data to those kept with the bank in order to determine whether or not there are any discrepancies between the two sets of data pertaining to the cash transactions you have conducted.

The end balance that you have created is referred to as the book balance, whereas the finishing balance of the cash records that the bank has created is referred to as the bank balance. It is quite likely that there will be disparities between both.

It is your responsibility to investigate any differences and make the necessary adjustments to your own records. An experienced bookkeeping and accounting service provider can help you with these processes.

If you were to disregard these disparities, ultimately there would be significant variations between the amounts of money that you believe you own and the amount that the bank says you have actually in an account. This would happen if you ignored the fact that there are differences between the two.

Also Read : Why Should Businesses Outsource Bookkeeping And Accounting Services

The consequence of this might be an overdrawn account, returned checks, and fines for going over the limit. In some circumstances, the bank could even make the decision to close your bank account.

It is also helpful to carry out a bank reconciliation in order to determine whether or not any checks written by customers have been returned unpaid, or whether or not any checks that you have written have been changed, or even stolen, and subsequently cashed against your notice. Therefore, detecting fraudulent activity is one of the primary benefits associated with performing a bank reconciliation. If you are involved in an investigation into potentially fraudulent activities, it may be necessary to reconcile your account on a regular basis to catch early warning signs.

Auditors and experts from bookkeeping and accounting services will always review the company's concluding bank reconciliation during the yearly audit. So, this is another incentive to reconcile.

In several instances, your records may differ with the:

1. Bank Fees

The services provided by the bank that come with additional costs, for example, a monthly fee for maintaining an account.

2. NSF Checks

There is a possibility that the bank did not accept part of the cheques you deposited because the individual or company that was responsible for writing the cheques did not have enough money in their bank account to transfer to your bank. These are what are called as NSF checks, which stands for "not adequate funds."

3. Errors in the Recordings

It's possible that the bank or you made an error while recording a deposit or a check that you made. The bank is almost always right, although on occasion they may make an error in their calculations.

The Crux of the Matter

Bank reconciliation statements are helpful tools that may be used to discover mistakes, omissions, and fraudulent activity. When done on a regular basis, they assist businesses in detecting and preventing fraud before it may cause significant harm and in halting the accumulation of mistakes. Hence it is a straightforward method that may be of great assistance in managing financial flows.

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