Bank reconciliation is the process by which a company compares its financial records with the records provided by the bank to identify any discrepancies. In simpler terms, it is a process that helps reconcile an organization’s records with the bank records. It helps businesses identify any differences between their own financial records and bank transactions.
Bank Reconciliation Procedure
The bank reconciliation process includes the following steps:
- Collect Bank Statements: The company collects its bank statements or its access to internet banking to begin the reconciliation process.
- Check and match accounting records: The accounting team checks and matches the company’s financial records with the bank documents.
- Identify discrepancies: The team identifies discrepancies, such as errors or missing transactions, and investigates them to determine the root cause of the discrepancy before reconciling any balance differences.
- Adjusting Entries: Based on the identified discrepancies or missing transactions, adjusting entries are made in accordance with Generally Accepted Accounting Principles (GAAP).
- Reconciliation Report: After making necessary adjustments in the accounting records, the team prepares a bank reconciliation report to identify any errors, adjustments, and any unchanged differences between the accounting records and the bank’s financial records.
Bank Reconciliation Statement
The bank reconciliation statement is a summary report that provides information on any differences between the company’s accounting records and the bank’s financial records. The statement includes:
- The Adjusted Bank Balance: The ending bank balance after adjusting for any errors, overdrafts, or other discrepancies identified during the reconciliation process.
- The Adjusted Book Balance: The final adjusted balance of the company’s accounting records.
- Any Differences: Any differences between the adjusted bank balance and the adjusted book balance are identified in this section. These differences must be investigated and cleared before closing the reconciliation process.
The Importance of Bank Reconciliation
Bank reconciliation helps businesses maintain accurate financial records and ensure that they are not overstating their available balance or revenues. Additionally, in case of fraud, the bank reconciliation process can help to identify suspicious transactions, making it an essential tool for fraud prevention. By understanding the key elements of a bank reconciliation report, businesses can identify and address any discrepancies, and operate their organizations with integrity, accuracy, and better control over their finances.