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5 Benefits of Bank Reconciliation for Your Business

When it comes to accounting and finance management, double-checking your figures is important. This is when bank reconciliation steps in. In this process, you match your business accounts against your bank statements. If there are some unexplained differences, accountants state that your bank statement has been reconciled. 

There are many benefits of bank reconciliation for your business. In this blog, we’ll learn why it’s important for your business.

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Benefits of Bank Reconciliation

First things, first. You might wonder about the difference between a cash book and a bank statement balance. Cashbook balance refers to the transactions added to your company’s general ledger. On the other hand, your bank statement balance is the cash balance on your bank statement.

Now, let’s talk about the advantages of bank reconciliation:

#1 Helps Avoid Errors  

Accounting errors are common. Though banks always implement proven processes to avoid any potential mistakes in your account, errors are inevitable. 

But you have to identify and fix them. Reconciling your account helps you find out any common accounting errors. These mistakes generally include double payments, addition/subtraction errors, missed payments, double payments, and alike. Let’s say, for example, if you mistakenly record an invoice as “paid” on your general ledger, bank reconciliation reveals that you forgot to write the check. 

Bank reconciliation helps identify such errors and any ongoing fraudulent transactions. It may even help uncover that your bank has made an error in your favour. After you have reconciled your statements, you can ask your bank to correct any spotted error.

#2 Helps Prevent Theft

As mentioned above, the bank reconciliation process involves comparing your bank’s financial transactions with your bank’s book transactions. As a result, you may find transactions that your bank recorded but are not found in your records.

You might have overlooked this transaction earlier. However, by examining your original documents carefully during bank reconciliation, you can find out these discrepancies. 

On top of that, you can also uncover transactions initiated by malicious individuals who want to steal money from your bank account. This is how bank reconciliation can help your business prevent theft.

#3 Keeps Your Account in Good Standing

When you use bank reconciliation to maintain your account in good standing, it means:

  • You know the amount you can spend in your account.
  • There is less chance you can overdraw your account. Overdrawing means you are withdrawing or trying to withdraw more money from your bank account.

It is important to note that overdrawing can have a negative effect on your credit score. Also, it can prompt the bank to charge you additional fees. 

There are some banks or other financial institutions that facilitate overdraft protection. But most of the time, they charge you a few in exchange for providing the service. If you do not get such protection on your bank account, you are likely to see some consequences.

#4 Track Transactions and Receivables

Sometimes, the payment you make does not appear on your bank statement until the next month. Also, you may unintentionally leave one check off of a despite. This mainly happens when you make multiple entries. This also happens when you make a payment, but it is not received or cashed. With uncashed checks, you may end up believing that you have more money to spend than what you actually have to spend.

If you receive payments in the forms of tax and utility payments, reconciling your accounts helps ensure that you do not miss any payments.

#5 Build and Maintain Healthy Relationships

When you perform bank reconciliation of your cash and account statements, everything remains transparent to all parties involved. And this clarity helps you and your bank maintain strong relationships.

By now, you know how important bank reconciliation is for your business. Now, it is important to note that you need to carry out this process very carefully and thoughtfully.

So, we have listed below some important steps in the process of the bank reconciliation

Important Steps for Bank reconciliation

You get your bank statement from your bank, typically at the month’s end. This statement lists the cash and other deposits made into your business checking account. It also includes bank fees such as your account servicing charges. 

Step 1: Compare your Deposits

First of all, match all your deposits in your business records with your bank statement. Then, compare each deposit amount in the debit side of your cashbook’s bank column with the credit side of your bank statement. Also, match the credit side of the bank column with your bank statement’s debit side. Don’t forget to mark items that appear in both the records.

Step 2: Adjust Your Bank Statements

Adjust the balance on your bank statement to the fixed balance. For this, you have to add deposits in transit, add/deduct bank errors, and deduct outstanding checks.

Deposits in transit refer to amounts received and recorded by the business but not by the bank. These must get added to your bank statement. On the other hand, outstanding checks are written and recorded in your business’ cash account but pending to be cleared in your bank account.

These are to be deducted from your bank balance. You have to compare the general ledger of your cash account to the bank statement to identify such errors.

Step 3: Adjust Your Cash Account

To adjust the cash balances in your business account, you have to add interest or deduct monthly charges as well as overdraft fees. You have to consider bank charges and any accounting errors to do this.

Step 4: Compare the Balances

Once you have adjusted the balances in all statements according to the bank as well as your business books, the final adjusted amount should be the same. If they are not, you have to repeat the bank reconciliation process again. Once you are able to make balances equal, you have to prepare journal entries for all adjustments to the balance per book.

Wrapping Up

Bank reconciliation is a very important process for your business. So, make sure you get this done right. You can outsource bank reconciliation to make sure it’s easier, error-free, controllable, and efficient.

See: Benefits of Accounting Outsourcing for your Startup

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