What is Bank Reconciliation and Why Does It Matter?

Dias Marendra

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What is Bank Reconciliation and Why Does It Matter_

If you have a hard time managing your bookkeeping, then you are not alone. In fact, only 14% of business owners are comfortable with finance, bookkeeping, and bank reconciliation. However, like it or not, bookkeeping is a must if you want to keep your business healthy and profitable.

Bookkeeping mistakes can hinder profits from your business. Fortunately, there is a way that you can do to avoid that, which is a bank reconciliation.

Definition of bank reconciliation

Bank reconciliation is when you compare your company’s financial statements with bank financial statements. Essentially, you make sure the information, transactions, and the amount of money in the company’s financial statements match the bank’s financial statements.

The purpose is to check whether there is an error in both statements and detect fraud. Often, there are transactions recorded on your financial statement, but you can’t find it on the bank statement.

Usually, this happens because the check you wrote haven’t yet been deposited by the recipients. Without bank reconciliation, this error will be difficult to detect and can harm your company.

The importance of a bank reconciliation

Bank reconciliation is not only useful to avoid errors and detecting fraud but also has other uses that can help your company. Let’s discuss further.

Avoid mistakes

You and your financial department is not the only one that can make mistakes; banks can also commit an error. Look for any discrepancies between both records and figure out which one is accurate, and which one needs correction. Bank reconciliation is very effective in detecting bookkeeping errors for both sides.

There are still various types of accounting errors that even professionals do them sometime, such as:

  • Duplicate expenses
  • Bank feeds missing a transaction
  • Sloppy data entry

Bank reconciliation can help you identify bookkeeping errors and avoid potential losses for your business.

Detecting fraud

Bank reconciliation can help you identify fraud before it goes out of control. If you notice a transaction occurs without your approval, investigate immediately. Maybe someone is using your credentials without you knowing it.

Recently, a friend of mine told me that he had seen a check on a bank statement, but he didn’t remember making one recently. To investigate, he crosschecked it with the company’s financial statements and found nothing similar.

Shortly after, my colleague reported the fraud to the bank, and the bank returned his money. That is why bank reconciliation is important for your business.

Improve business operations

If you notice error becoming too frequent, it means something is wrong with your business operations. It means that your company has a low efficiency, especially in the bookkeeping and finance sections.

It is important that you fix those errors using bank reconciliation. When you reduce errors or even prevent it from happening, your business efficiency increases. Rising efficiency means saving time, and time saved is money saved.

How to do a bank reconciliation

For a company with hundreds to thousands of transactions per month, manual bank reconciliation is time consuming. That is why many companies implement accounting systems in the company to facilitate the process.

With accounting software, the reconciliation process will be easier and faster. With just a few clicks, crosschecking company financial statements with bank financial statements can be done quickly and easily.

If you find a discrepancy between the company’s financial statements and the bank financial statements, investigate immediately. Check whether there are records of missing transactions or outstanding payments, or is there a bigger problem that you need to address?

How often should you do it?

Actually, there are no wrong answers to this question. However, we suggest that you should carry out bank reconciliation at least once a month.

There are also companies that run this process every few days. The reason is to avoid unexpected expenses or fraud that usually happen in online transactions. If you do the bank reconciliation once a month, by the time you notice a fraud, it will be too late to repair the damage.

Conclusion

Bank reconciliation is an important process that any company must do at least once a month. Not only minimizing bookkeeping errors and detecting fraud, reconciliation is also useful to increase your financial department efficiency.

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