It’s important for businesses to keep financial statements in order to track the company’s cash flow position, but what if the company statement’s final number doesn’t match the statement issued by the bank? That’s where a bank reconciliation statement comes in.
Traditionally compiled by bookkeepers, bank reconciliation statements help a business identify and solve errors in their financial documents. While every company’s account reconciliation process will be different, there are common errors that bookkeepers—whether freelance or full-time—look out for.
What is a Bank Reconciliation Statement?
A bank reconciliation statement is a document that compares a company’s account activity to the activity reported by the bank. Traditionally completed by a bookkeeper, bank account reconciliations ensure that a company’s records accurately reflect the activity in its bank account.
Bank reconciliation statements are important for several reasons:
- Fraud Detection: A 2022 ACFE study found that financial statement fraud does the fastest and most damage to a company on average despite being less common than methods like extortion or misuse of resources. Account reconciliations help ensure that all transactions are accounted for and authorized.
- Cash Position: Once a company’s statements are reconciled, the company should have an accurate view of its cash position. A company’s cash position is a strong sign of its financial strength and whether the business can afford its current liabilities.
- Compliance: Many businesses are required to produce bank reconciliation statements for compliance purposes, such as tax reporting or financial audits.
- Error detection: The reconciliation process helps to identify any errors that may have occurred in the company’s internal records or in the bank’s records. This helps to ensure that financial information is accurate and reliable.
How to Do a Bank Reconciliation: An Overview
The account reconciliation process is usually completed on a monthly basis by a bookkeeper, though sometimes an accountant might take on the role. While the exact process for bank reconciliation varies by company, the high-level process for bank reconciliation is as follows:
- Gather all necessary financial records: Records include company financial statements and the company’s internal records like deposit slips and bank statements. Also note any outstanding checks or deposits in transit.
- Compare the company’s internal records to the bank statement: Compare the transactions listed on the company’s financial statement to the transactions listed on the bank statement. Look for discrepancies or missing transactions.
- Identify and record outstanding checks or deposits in transit: Some transactions that have been recorded in the company’s internal records may not yet have cleared the bank account. Once you’ve accounted for them, you’ll have your adjusted cash balance.
- Make any necessary adjustments to the company’s internal records: If any discrepancies or errors are found in the company’s adjusted cash balance, make the necessary adjustments.
Common (and Potentially Fraudulent) Errors In a Bank Reconciliation Statement
At their core, bank reconciliation statements are meant to identify and correct any errors in a company’s financial statement. Errors in internal financial records not only look bad but can have a significant impact on the company’s financial position. Common errors that bookkeepers look for in a bank reconciliation statement include:
Unrecorded Transactions
Unrecorded transactions are not recorded in the company’s internal records, but they are reflected on the bank statement. Bookkeepers comb through the transactions listed in the accounting journal and compare them to the transactions listed on the bank statement. Unrecorded transactions can indicate that the transactions were not entered into the accounting system or that a check or deposit lost or stolen.
Mismatched Transactions
This error occurs when a transaction is recorded by the company, but the amount or date does not match the corresponding transaction on the bank statement. Mismatched transactions can indicate that the transaction was recorded incorrectly or that there was a mistake made by the bank.
Mismatched Vendors
A good bookkeeper for business is not just looking at transaction dates and amounts when creating a bank reconciliation statement. A new vendor or a vendor that seems unrelated to your business could be a sign of fraudulent behavior by an employee. Bookkeepers check the invoice and description to investigate. They may also look for mismatched vendors in which an amount disbursed to a vendor will match the same amount and date to a vendor of a different name.
Outstanding Checks
These are checks written and recorded in the company’s internal records that have not yet cleared the bank account. Outstanding checks can indicate that the check has not yet been cashed or that it was lost or stolen.
Deposits in Transit
This occurs when a deposit is recorded in the company’s internal records but has not yet been reflected on the bank statement. Your bookkeeper will find this error when comparing the company’s deposit slips to the bank statement. Deposits in transit can indicate that the deposit has not yet been processed, that the deposit was lost or that the entity has forgotten to send the deposit to the bank.
Bank Charges and Fees
Often times, bank charges and fees will not be recorded in the company’s internal records. Your bookkeeper will compare the bank statement to take note of any charges or fees to ensure that there were no mistakes made by the bank.
The Benefit Of A Bookkeeping Expert for Account Reconciliations
A bookkeeper is an ideal person to prepare a company’s bank reconciliation statement, because they know what errors to look for and can provide valuable expertise to improve accuracy and integrity. Some benefits of having a bookkeeper perform the account reconciliation include:
- Separation of duties: A freelance bookkeeper can provide an independent third-party review of the company’s financial information, separate from the individual responsible for invoicing and signing off on checks. This is particularly important for companies that have a high risk of fraud or mismanagement.
- Specialized knowledge: Bookkeeping experts have the knowledge and experience to identify potential errors or discrepancies that may not be immediately obvious to someone who is not well-versed in accounting principles.
- Better processes: Bookkeeping experts can establish better processes and procedures for reconciling the company’s accounts. This includes identifying and implementing best practices, creating checklists and providing training and guidance to staff.
- Time savings: Bookkeeping experts can save company time by performing reconciliations in a timely and efficient manner, which allows the company to focus on other important business activities.
- Compliance: Bookkeeping experts are familiar with accounting standards and regulations and can ensure that the company’s financial statements are in compliance with relevant laws and regulations.
Want to ensure that your company’s bank reconciliation statements are accurate and reliable? Paro’s all-in-one bookkeeping services can help your company with account reconciliation, payroll, cash flow management and more. Take the next step to get end-to-end management of your books by industry experts.
