Why is it Important for Companies to Reconcile the Bank Statement Every Month?

Bank reconciliations are essential financial records. Financial records are maintained so that final accounts can be prepared.  Given that the overriding requirement of final accounts is that they should fairly present the financial position and income and expenses of the entity, it follows that the underlying financial records must be reliable.  This means that all transactions should be recorded accurately. 

The purpose of a bank reconciliation is to ensure that the underlying records relating to bank transactions are reliable.  This means that the completion of a bank reconciliation is more than a matter of arithmetical accuracy.  It is not sufficient to provide a statement which reconciles the balance on the bank account in the entity’s ledger and the bank statement.  Rather, it is important to ensure that the ledger balance is correctly stated, by making any correcting entries in the ledger, so that the corrected ledger balance is reconciled to the bank statement balance.  

REPORTING THE BANK BALANCE

From the discussion above, it follows that the bank balance to be reported in the final accounts is the corrected ledger balance.  If the corrected balance is a debit balance, then the entity will have funds at the bank which should be reported on the balance sheet as a current asset. If the corrected balance is a credit balance, then the bank account is overdrawn.  This should be reported on the balance sheet as a current liability.

ADVANTAGES OF BANK RECONCILIATION

Proper reconciliation of bank statements is vital for any small business.  Even if you don’t have an accountant on staff, this procedure must be done monthly.  Whether you use financial accounting software or you simply keep track of your bank records, double-check that everything adds up.

Keeping a Close Eye on Company Performance: When small business owners do not take the time to reconcile their bank statements personally, or at least see an overview of the results, they may be unaware of potential income issues or shortfalls.  While delegating can help you manage your company better, you need to be able to see exactly what is going on within your company.  Keeping an eye on bank statements can help you keep your finger on the pulse of your company and spot income fluctuations.

It makes accounts to be in good standing: Keeping your account in good standing through bank reconciliation means that, when you are aware about the amount that you can spend in your account, you are less likely to overdraw the account, which means withdrawing or attempting to withdraw more money than what your account have.  Keep in mind that overdrawing will negatively affect your credit score and can prompt the bank to charge you fees.  While some financial institutions offer overdraft protection, most often they would charge you or your company a fee for using such a service.  And if you do not have such type of protection on your account, you will suffer worse consequences.

Loss Prevention: When bank statements are not monitored and reconciled, the potential for undetected loss is high.  Not all employees or accounting firms are honest, and you may not miss money that has been taken for some time.  This is how some employees are able to embezzle thousands if not millions of money over time.  Reconciling your bank statement helps you prevent losses and may indicate a potential problem in your accounting system.

It will keep mistakes at bay: You will know that a bank is reliable when it implements procedures to avoid making mistakes in your account, but unfortunately, mistakes do happen sometimes, with the most common being a simple entry error.  Nevertheless, banks will be able to correct these mistakes when you point them out after you complete your reconciliation.

It helps you detect accounting errors: By reconciliation, you will be able to detect accounting errors that commonly occurs in business, such as double payments, addition and subtraction errors, missed payments and lost checks.  For example, if you have mistakenly recorded an invoice as “paid” on your ledger, bank reconciliation can reveal that you have forgotten to write the check.  There are also cases where your bank committed an error in your favor, so you will be liable to return that money, even if you have already spent it.

It achieves accurate balance: A bank reconciliation will reveal which cash transactions have been cleared with the bank and which of those are still outstanding.  While a check is the most common form of transaction that would remain open at the end of the statement period, the bank may not clear it as of the ending date of the statement if you made a deposit at the end of the month.

Catching Errors: Even if you implement strict control measures, the potential exists for human error in accounting.  If companies fail to reconcile their bank statements every month, these errors may go undetected and they could be costly.  For example, if a teller at the bank calculates a deposit incorrectly, the company may end up short of the funds it needs to continue to doing business.  The reconciliation process helps provide a double-check to stop mistakes.

Following Up on Transactions: If clients are complaining about not receiving funds, it could be possible that a check was lost in route.  When you are reconciling your bank statement every month, you can catch checks that have not cleared, and this will help you track down any potential missing payments.  In addition, you can use your reconciliation statement to make sure your other company transactions are going through and have been calculated for the proper amount.

Reference:

• ACCA notes
• Fraud Magazine
• ConnectUs Magazine