A Bank statement is the list of all the financial transactions that occur within a company's bank account over a specific period which is managed by the bank. A company's ledger is an accounting record of all financial transactions and is managed by the company itself.
Ideally, both the records should be equal, however, in reality, that's hardly the case. Accounting mistakes, intentional errors, or timing differences between when transactions are recorded in bank statements versus the company’s ledgers can lead to differences. And that's where bank reconciliation comes into the picture.
Let's understand the process of bank reconciliation with the help of this comprehensive guide.
What is Bank Reconciliation?
Bank reconciliation is a process through which companies ensure that the balances and transactions in their accounting record match the records available in their bank account, which is represented by the bank statement. Simply put, it confirms that the cash balance presented in your company's ledger equals the actual cash available in your company's bank account.
During the bank reconciliation process, any deviation or mismatch from the bank statement is identified and rectified to align the two sets of records. These discrepancies can occur due to manual accounting errors, timing differences, omissions, or deliberate fraud.
Bank reconciliation is usually conducted manually by an accountant or controller in the company. However, manual reconciliation can be time-consuming and error-prone. That's why using certain bank reconciliation software can make the process error-free and quicker, significantly improving efficiency.
Additionally, AI tools for finances can be used for performing financial analysis, budgeting, and reporting. These tools can further elevate the automated bank reconciliation process.
Bank Statement vs Company’s Accounting Record
A bank statement of the company consists of all the transactions made by the company through the bank whereas the company’s accounting record offers a more in-depth analysis of the company’s transaction and may include transactions not related to the bank. While the bank statement is issued by the bank, the company’s ledger is maintained by the company.
A bank statement serves as a record of transactions from the bank's perspective, on the other hand, the company’s ledger functions as an internal financial record, used for reporting, accounting, and financial decision-making in the company.
During a bank reconciliation, both of these records should be equal. However, most of the time, both records do not match. Some of the reasons for the mismatch can be the following:
Bank charges: Charges that banks deduct for the services they provide.
Outstanding checks: Issued checks by the company to its creditors which have not yet been deducted from the bank balance.
Deposit in transits: Checks and deposits received by the company not yet reflected in the bank statement.
Not sufficient funds (NSF): An NSF check indicates that the issuer's account balance was inadequate to cover the transaction mentioned in the checks. The bank returns the checks to the depositor due to insufficient balance.
Interest income: This is the credit interest paid by banks on some bank accounts.
How to Conduct a Bank Reconciliation Process?
To perform a bank reconciliation for your company, start by collecting the bank statement and your company’s accounting records for a detailed comparison. Next, analyze your bank statements and pick out transactions not included in the company’s ledger.
Similarly, review the ledger and record the transactions not present in the bank statement. The last step is to adjust both the records by detecting any errors and omissions to align both the records and then make a record of the whole process.
Here's a step-by-step guide on how to conduct a bank reconciliation for your company.
1. Compare the bank statement with the company's financial records.
Gather your updated bank statement and your company's accounting record. Start by looking at both side by side. It's normal for businesses to have mismatched cash balances due to timing differences in transactions. The difference can be small or large depending on the business size and pending reconciliations.
2. Analyze your bank statement
Review every outgoing transaction in your bank statement, including checks, transfers, and bank fees, and make sure that each of them is recorded in the company's ledger. Make a record of transactions not mentioned in the company's ledger. Discrepancies here can include bank service fees, direct deposits, automatic payments or interest deductions not recorded in the ledger.
3. Review your company's financial records
The next step in the process is to analyze all the transactions mentioned in the company's ledger that are not listed in the bank statement. This can involve records omitted due to timing differences, such as deposits in transit or payments that have yet to be processed by the bank and issued checks that have not yet been received or deposited by the recipients.
4. Adjust the balance of both records
The final step of the reconciliation is to match the closing balance of the company's ledger with that of the bank statement. Once you identify the discrepancies in both records, you must adjust them.
Start with adjusting the deposits in transit and outstanding checks not mentioned in the bank statement. Adjust additional charges incurred by the bank, such as fees and interest deductions, in the company's financial record. Also, include any other omissions or errors in the records.
5. Record the reconciliation
Set up a bank reconciliation template in Excel to prepare the bank reconciliation statement. Include all the details of the discrepancies found, explanations behind them, adjustments made, and the final reconciliation balance in it. After reconciliation, the balance of the bank statement and the company's ledger should be the same.
To avoid any manual errors in this step that can adversely harm your financial accuracy, you can automate the bank reconciliation process with an AI-driven platform like Osfin.ai.
Osfin.ai automates your key banking processes, managing high-volume transactions with unmatched speed and accuracy to enhance your cash flow visibility. Plus, an intelligent interface ensures you have access to actionable financial data and insights.
Bank Reconciliation Statement
In the bank reconciliation process, a bank reconciliation statement is developed, which is a summary of all the deposits, withdrawals, and other business activities affecting the bank account. It accounts for all the discrepancies and mismatches between your company's internal balance sheet and bank statement and the actual reason behind them.
Here’s a simplified sample of the bank reconciliation statement:
Example of Bank Reconciliation
Let's take a bank reconciliation example to understand the whole process better. Let's say company A is doing bank reconciliation at the end of the month.
1. The bank account of company A shows $190,071, and its accounting records show $204,946.
2. As the reconciliation process begins, the company's accountants compare the company's ledger and the bank statement.
3. While analyzing the bank statement, they notice $1005 worth of NSF, and $220 worth of bank fees. Also, there is an interest revenue of $55.
4. The amount of bank fees and NSF is deducted from the company's ledger and the interest revenue is added.
5. When they review the company's ledger, they find $14,345 of deposits in transit, which include checks from different creditors that have not yet been deposited in the bank. There was also $640 in outstanding checks which might not have been cashed yet.
6. This amount of deposits in transit is added to the bank statement and the amount in outstanding check is deducted.
7. The accountants create a bank reconciliation statement that includes $220 and $1005 in the less section of the company's ledgers and $640 in the less section of the bank statement.
8. Similarly, the statement includes $55 as interest revenue in the add section of the company's ledger and $14,345 in the add section of the bank statement.
9. After performing the reconciliation, the balance of both the records is the same, which is $203,776.
The bank reconciliation statement of Company A will look like this:
Importance of Bank Reconciliation
There are several reasons why bank reconciliation is an important measure for businesses. These include:
- Identifying accounting errors such as omitted entries, duplications, or accidental discrepancies can help lower taxes.
- Detecting fraudulent activities by uncovering unauthorized transactions.
- Managing risks by giving accurate cash flows that can help in organizational planning.
- Improving your balance sheets' accuracy and confidence enables you to make informed decisions.
Challenges with Bank Reconciliations
During the process of bank reconciliation, one can encounter several challenges, such as:
1. High transaction volumes
With hundreds or even thousands of transactions accumulating daily, timely and accurate reconciliation is essential. Once reconciled, any discrepancies require further investigation, processing, and resolution. Manually handling this process demands significant effort, meticulous attention to detail, and absolute precision at every step.
2. Uncleared checks
These are outgoing payments that have been recorded in the company's ledger but have not yet been processed by the bank. Accountants account for these during reconciliation to ensure accurate cash flow tracking. Likewise, customer checks received and recorded may still be in transit within the banking system, requiring adjustments during the reconciliation process.
3. Several bank accounts and currency differences
Sometimes, banks use more than one account with different banking partners. There can also be a problem of currency differences if the business expands to global level. This makes it quite complex for companies to match their internal records with several bank accounts.
4. Splitting bulk amounts
In some cases, bank statements consolidate multiple transactions into bulk amounts rather than listing them individually. Reconciling these transactions requires advanced analysis, as each aggregated entry must be broken down and matched accurately with corresponding records in the company's ledger.
5. Manual processing
Traditionally, bank reconciliation has been a manual process. However, with the high volume of transactions, errors are inevitable. These errors not only lead to inaccurate financial records but also require additional time and effort to identify and correct them, making the process inefficient and prone to unnecessary delays.
These challenges can be overcome by automating bank reconciliation by leveraging AI tools for finances. By using the latest technologies, automated bank reconciliation can streamline reconciliation processes by significantly reducing manual effort, minimizing errors, and gaining real-time insights into transactions.
Why Automated Bank Reconciliation is the Ultimate Solution?
Bank reconciliation is a necessary step that companies use to manage their cashflows, detect frauds and inaccuracies, and make informed business decisions based on reliable financial data. However, certain challenges hinder the proper execution of the process.
To overcome these challenges, using reliable bank reconciliation software provided by Osfin.ai can greatly enhance the efficiency of the process. It helps you automate the reconciliation process with unmatched speed and flawless accuracy.
With no significant overhead costs and an intuitive interface, Osfin.ai can seamlessly reconcile millions of data entries and enhance your financial operations with AI-driven automated document processing. Further, you can customize the workflows to align with your specific requirements and gain greater visibility and control over your financial data.
FAQs
1. What is bank reconciliation?
Bank reconciliation matches the accounting records of a company's ledgers with the company's bank statement. During the process, errors or discrepancies are identified and corrected to match the records.
2. How often should you do a bank reconciliation?
Bank reconciliation should be performed at least once a month to ensure accuracy and promptly detect discrepancies. However, businesses or individuals with high transaction volumes may go for more frequent reconciliations, such as weekly or daily.
3. What is the importance of bank reconciliation?
Bank reconciliation helps companies identify accounting errors in their records, detect fraudulent activities, manage risks by streamlining operations, lowering tax burdens, and improving the authenticity of the company's transactions.
4. Is bank reconciliation difficult?
There are many challenges when performing bank reconciliation, such as a high volume of transactions, several bank accounts, uncleared checks, and manual processing. Using automated bank reconciliation can greatly help in tackling these difficulties.
