Bank reconciliation: what is it and what are its benefits?
Bank reconciliation is a crucial process in financial management: it aims to ensure consistency and accuracy between the company’s accounting records and the information provided by the bank to ensure proper management and improve decision making. We delve into what it is, its importance to every business owner and how to perform it.
Balancing the books is one of the most important tasks for any company. What may seem simple can be challenging in high-growth companies with a high volume of transactions and activities. Accounting control is an essential process to monitor movements and ensure that everything is going according to plan. For this reason, one of the most commonly used control tools is bank reconciliation, which allows you to know where there are errors or discrepancies in the general accounting so that you can provide the appropriate solution.
What is bank reconciliation?
Bank reconciliation is an accounting procedure designed to ensure that the balances and transactions recorded in the company’s books match the details provided by the bank. In other words, it is the process of matching and comparing the company’s financial information with the corresponding bank details, which allows discrepancies, errors or omissions in the accounting records to be identified and corrective action to be taken.
This process involves comparing and checking bank statements with the company’s accounting records, such as the company’s own ledgers and even invoices and other financial documents. It is therefore a practice that every entrepreneur should adopt when starting a company.
The importance of bank reconciliation
Essentially, bank reconciliation is the process of checking and adjusting differences between book and bank balances to ensure that they match. Performing this procedure in an integrated manner has important advantages:
- Detection of errors and fraud. By carefully comparing bank records with internal accounting records, you are more likely to identify discrepancies, inadvertent errors, and even fraudulent activity.
- Accuracy of financial reporting. Bank reconciliation ensures that the company’s financial information is accurate, avoiding misunderstandings and providing a clear and reliable picture of the company’s financial position.
- Cash flow control. This procedure provides a detailed overview of the cash inflows and outflows from bank accounts, providing clarity and knowledge of the cash situation in order to be able to make decisions and anticipate cash needs.
- Control of accounts receivable. Reconciliation facilitates the accounts receivable control process by checking that the invoice or cheque issued appears in the bank ledger.
- Improved decision making. Business decision-makers can plan and act strategically and quickly with up-to-date and appropriate financial information, resulting in better-informed decisions.
- Save time and resources. Identifying and correcting errors in a timely manner prevents major problems from occurring in the future, with the increased time and resources required to resolve them.
- Regulatory compliance. In many countries, such as Spain, bank reconciliation is mandatory for all companies, regardless of their size or activity. In others, such as Mexico, it is not mandatory, but ensuring that transactions are properly documented and comply with regulatory requirements will avoid future legal sanctions that could jeopardise the financial integrity of the company.
How to perform bank reconciliation step by step
The reconciliation process can be broken down into several steps to ensure a smooth implementation:
Gathering information
The first step is to gather any documents, invoices, bank statements or records for the period you want to compare. This includes bank statements, cancelled cheques, cash and any other relevant records.
Internal accounting records
The second step is to check the company’s internal accounting records that you collected earlier, such as ledgers, transaction records, invoices and receipts. These must be up to date and accurately reflect the company’s financial transactions.
Comparison of book and bank balances
This is where the comparison of the internal information with the bank ledger begins. This can be done manually or with the help of a computer programme, which makes the comparison quicker and more reliable.
Identifying errors and discrepancies
All transactions should be correctly identified in both ledgers. If there are differences, it is important to investigate and determine the cause, bearing in mind that the difference may be due to recording errors, but also to outstanding cheques or transactions.
Adjustments and corrections
Once the possible causes of differences between the internal accounting records and the external bank records have been identified, the discrepancies should be resolved by recording all transactions in one or the other, as appropriate. It is advisable to keep a record of the adjustments made for future reference.
Final reconciliation
Once any necessary adjustments have been made and any errors have been corrected, reconciliation should be performed again to check that the balances match and to confirm that the information is accurate, consistent and complete.
Automating reconciliation
It is advisable to keep the accounting information as up to date as possible. This means that the process needs to be carried out on a regular basis and, in practice, most companies perform their reconciliation several times a week. In an increasing number of cases, the process is done in real time and is automated with the support of dedicated treasury management software, which saves time and resources.
Performing the bank reconciliation process on a regular basis helps ensure the integrity of the company’s financial records and enables more effective financial management. It is therefore a vital tool for making informed decisions and operating effectively in the marketplace.
