What is a bank statement and how does it assist in identifying discrepancies?
Bank reconciliation is the process that companies use to make sure that the cash balances they show on their books matches the actual cash they have in the bank. With companies’ increasing use of other entities to make and receive payments, it’s probably wise to think of bank reconciliation as also applying to the cash that passes through these other entities, including online payment systems. But banks still hold the overwhelming majority of business accounts and companies can use the same basic process they use in bank reconciliation to pinpoint their cash positions elsewhere. Show
What Is Bank Reconciliation?In bank reconciliation, companies compare the balances and transactions on their external bank statements to the cash balances and transactions recorded in the cash accounts of their general ledger — the “cash books”. They spot discrepancies and bring the two cash amounts into alignment by adjusting for as-yet unrecorded transactions, such as deposits that have not yet cleared the banking system and new bank fees. Bank reconciliations are an important tool in cash-flow management and are usually handled by an accounting department or a business owner. Key Takeaways
Bank Reconciliation ExplainedThe cash balance shown on a company’s internal balance sheet almost never matches the actual cash balance it has in its bank or other payment services. These discrepancies have a variety of causes, from timing issues in the course of normal business operations, to errors and even fraud, and can vary in size from very small to the quite large. Bank reconciliation has to do with identifying and settling these discrepancies in order to get an accurate picture of the business’s available cash. It is an integral part of effective cash-flow management and internal controls. Why Is Bank Reconciliation Important?A business’s investments in marketing, R&D and technology all depend on it having the necessary level of cash. Bank reconciliation is one of the processes that tells a company, at any given point in time, whether it’s in a position to fund something new or should hold back. 4 Reasons Bank Reconciliations MatterBank reconciliations are particularly important because they:
Who Should Oversee Bank Reconciliations?Someone in a financial position — like a company’s controller or an accounting manager — is usually responsible for overseeing the bank reconciliation process. A staff accountant typically does the actual reconciling of the company’s accounting records and bank statements, in accordance with segregation of duties best practices. At a big company, there would typically be several people within the accounting department to handle different account reconciliations. It’s common for the owner to do the bank reconciliation at a smaller company. Bank Reconciliation Process FlowThe bank reconciliation process has three basic steps. The first is comparing the cash balances and transactions on the company’s books to the cash balances and transactions listed on an external bank statement. Because of things like electronic transfer fees, outstanding checks and deposits and different cut-off periods, the two rarely match. In the second step you adjust both balances. Both the amount of cash in the bank account and the amount of cash on the company’s books often change in this step as you account for transactions reflected on the one but not the other. In the third step you record the reconciliation. Basically, what you’re doing here is recording a change to the cash accounts in your general ledger. The bank account balance will adjust naturally as the transactions you identified in the second step move through the banking system. Important Terms to Know for Bank ReconciliationThere are many things that account for the differences between a company’s bank statement and its accounting records. Three of those things have evolved into common terms you may encounter at various stages of a bank reconciliation:
Benefits of Bank ReconciliationBank reconciliation is such a fundamental part of corporate accounting that the only real question for most companies is who does it and with what tools — not whether to do it in the first place. Among its biggest benefits, bank reconciliation:
Challenges With Bank ReconciliationsIn trying to resolve the mismatches between their books and their bank statements, accountants tend to look for a few different causes. The most common are:
How to Do Bank Reconciliations Step by StepCompanies can assign different people to handle different parts of a bank reconciliation and can complete reconciliations in a number of different ways. The basic sequence, however, consists of the following six steps.
Example of a Bank ReconciliationA hypothetical San Francisco home contractor, By the Bay Contracting, is doing a reconciliation at the end of January. By the Bay’s bank account shows $106,800 but there is $120,000 in cash on the company’s books. The company’s accountant sets about reconciling the discrepancy. She notices $200 worth of bank fees that aren’t reflected on the company’s books and $13,000 worth of deposits in transit — checks from three separate home renovation clients that were received earlier in the week but that have not been deposited at the bank. The accountant calculates that the bank account balance is going to end up at $119,800 once it includes the $13,000 of deposits in transit. At the same time, the cash balance of $120,000 on the company’s books will go down by the $200 in bank fees. She creates a bank reconciliation statement that itemizes both the $200 in unrecorded bank fees and the $13,000 in outstanding deposits. Bank Reconciliation StatementHere’s an example of how By the Bay Contracting’s bank reconciliation would look. Tips for Successful Bank ReconciliationsBest practices in bank reconciliation vary from business to business, especially as a company grows and its operations become more complex. The following tips, however, can be applied to any organization’s bank reconciliations.
Free Bank Reconciliation TemplateOne way to become familiar with the process of bank reconciliation is to work through a basic example. Download our free Excel bank reconciliation template and try it out. As downloaded, it will reflect the reconciliation numbers described in the By the Bay Contracting example described above, but with additional rows for further adjustments. You can change the numbers to reflect examples from your organization’s statements and books, and add rows as needed (but don’t forget to adjust the provided formulas). Download template Manage Bank Reconciliations With NetSuiteFor companies with high transaction volumes, multiple bank accounts or multiple currencies, bank reconciliation can be a time-consuming process. NetSuite Cash Management can automate a crucial part of this process — the manual comparison of bank data with companies’ accounting system data. NetSuite users can automatically import bank data, saving time and improving accuracy. For instance, the MD Restaurant Group, a chain based in Illinois, is using NetSuite’s bank reconciliation functionality to compare financials from 19 different entities. Bank reconciliation aligns the cash balances on a company’s bank statements with the cash balances it has on its books. It is an essential part of corporate accounting. Among the benefits of bank reconciliation are better cash-flow management, better management of accounts receivable and a better ability to spot fraud. The right steps and technologies can help companies increase the speed and efficiency of their bank reconciliation processes, regaining time for other activities. #1 Cloud Bank Reconciliation FAQsWhat do you mean by bank reconciliation?Bank reconciliation starts by comparing the cash a company has on its books to the cash it has on its bank statement. Adjustments are made to each so that the two figures match, and the company has an accurate picture of its cash position and all cash transactions for the period. Examples of adjustments include deposits that have been made but haven’t yet been cleared at the bank and so aren’t included in the bank statement, bank service fees and returned checks that haven’t yet been accounted for in the company’s books. What are the 6 steps for bank reconciliation?The first step is for a company to compare its bank account statement with its bookkeeping record. The two figures are rarely the same when a reconciliation starts. Step two is to adjust the bank account balance and step three is to adjust the balance on the company’s books. The final step is recording the reconciliation. What are the three methods of a bank reconciliation?Reconciliations can be done manually, using paper. A second method is to do them with spreadsheet software. The third method is to do reconciliations with the help of cloud-based accounting software. What is a bank reconciliation statement?A bank reconciliation statement is a document that itemizes adjustments to a company’s bank balance and its accounting books so that the two numbers match. What are some tips for a successful bank reconciliation?First, do your reconciliation on a regular basis so the effort doesn’t get too complicated. Two other tips are to automate those aspects of bank reconciliation that you can, and to close bank accounts that don’t have a lot of activity, so you aren’t doing small reconciliations. What is the bank statement?A bank statement is a record of all the banking transactions—including deposits, withdrawals and transfers—that apply to your account over a given period of time. Your bank statement may also include the starting and ending balances of the account, your account number and other important account information.
What are bank discrepancies?Discrepancy can be defined as an error or defect, according to the issuing bank, in the presented documents compared to the documentary credit, the UCP 600 rules or other documents that have been presented under the same letter of credit.
What are the common causes of discrepancies in bank accounts?There are several reasons for this difference, which are as follows:. Outstanding checks. The company has issued checks that have not yet been presented to the bank for payment. ... . Deposits in transit. ... . Interest on deposited cash. ... . Bank service fees. ... . Check printing charges. ... . Bank error. ... . Company error.. What are the different causes of discrepancies in bank reconciliation?Causes of Difference in Bank Reconciliation Statement (BRS)
Two broad terms cover up major challenges due to which differences may appear: Errors a bank or a business make. Time difference in recording an entry.
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