What is Bank Reconciliation? How important is it to the management of your cashflow?
Bank reconciliation statement is a report which compares the bank balance as per company’s accounting records with the balance stated in the bank statement.
It is normal for a company’s bank balance as per accounting records to differ from the balance as per bank statement due to timing differences. Certain transactions are recorded by the entity that are updated in the bank’s system after a certain time lag. Likewise, some transactions are accounted for in the bank’s financial system before the company incorporates them into its own accounting system. Such timing differences appear as reconciling items in the Bank Reconciliation Statement.
The purpose of preparing a Bank Reconciliation Statement is to detect any discrepancies between the accounting records of the entity and the bank besides those due to normal timing differences. Such discrepancies might exist due to an error on the part of the company or the bank.
Importance of Bank Reconciliation
- Preparation of bank reconciliation helps in the identification of errors in the accounting records of the company or the bank.
- Cash is the most vulnerable asset of an entity. Bank reconciliations provide the necessary control mechanism to help protect the valuable resource through uncovering irregularities such as unauthorized bank withdrawals. However, in order for the control process to work effectively, it is necessary to segregate the duties of persons responsible for accounting and authorizing of bank transactions and those responsible for preparing and monitoring bank reconciliation statements.
- If the bank balance appearing in the accounting records can be confirmed to be correct by comparing it with the bank statement balance, it provides added comfort that the bank transactions have been recorded correctly in the company records.
- Monthly preparation of bank reconciliation assists in the regular monitoring of cash flows of a business.
- Bank reconciliation statement ensures the accuracy of the balances shown by the pass book and cash book.
- Bank reconciliation statement helps to detect and rectify any error committed in both the books.
- Bank reconciliation statement helps to update the cash book by discovering some entries not yet recorded.
- Bank reconciliation statement indicates any undue delay in the collection and clearance of some cheques.
In recent times in Nigeria, it has been noted that banks do overcharge their customers. They are getting away with it because most businesses and high net worth individuals do not use this control mechanism over their bank account either due to ignorance or lack of understanding.
Our firm can help your business in this area by helping you recover excess bank charges and also be a watch dog over your bank account by helping you prepare bank reconciliation on monthly basis. For our assistance Click here