Bank reconciliation: the key to accurate financial records

Bank Reconciliation: The Key to Accurate Financial Records

Every business needs to keep accurate and up to date financial records to track their income and expenses. One of the most critical financial processes is bank reconciliation. This Legal Kitz blog will discuss all you need to know about bank reconciliation.  

What is bank reconciliation?

Bank reconciliation is the process of comparing a company’s records of its bank transactions with the records of the bank’s transactions. This is done to ensure that the company’s records are accurate and complete, and to identify any discrepancies or errors that may exist. Bank reconciliation is a crucial aspect of financial management, as it helps ensure that a company’s financial records are up to date and accurate. 

The process of bank reconciliation involves matching the transactions recorded in a company’s bank statement with the transactions recorded in its own records. This is done by comparing the amounts, dates, and other details of each transaction. Any discrepancies or errors are then investigated and corrected. 

What is the purpose of a bank reconciliation statement?

Bank reconciliation statements are documents that summarises the results of the bank reconciliation process. It shows the starting balance of the company’s bank account, the deposits and withdrawals that have been recorded by the bank, the deposits, and withdrawals that have been recorded by the company, and any reconciling items that have been identified. 

The reconciling items are the transactions that appear on the company’s records but not on the bank statement, or vice versa. These may include outstanding checks, deposits in transit, bank fees, and interest earned or paid. By identifying these reconciling items, the company can make any necessary adjustments to its records and ensure that its financial statements are accurate. 

What is the purpose of bank account reconciliation?

The primary purpose of bank account reconciliation is to ensure the accuracy of the financial records of a business. When a business makes a deposit or a withdrawal, it records the transactions in its books. However, the bank may not process the transaction immediately, or there may be delays in the posting of the transaction. These discrepancies can result in a difference between the bank balance and the company’s records. 

Bank account reconciliation is also important for detecting fraud or embezzlement. By regularly reconciling their bank accounts, companies can quickly identify any suspicious transactions or patterns that may indicate fraudulent activity. This can help them take prompt action to prevent further losses. 

Additionally, bank account reconciliation is a requirement for most companies. In many cases, it is required by law or by regulatory bodies. For example, companies that are publicly traded are required to reconcile their bank accounts on a regular basis as part of their financial reporting requirements. 

How often should bank accounts be reconciled?

The frequency of bank account reconciliation can vary depending on the size and complexity of a company’s operations. In general, it is recommended that companies reconcile their bank accounts on a monthly basis. This allows them to identify any discrepancies or errors in a timely manner and make any necessary adjustments to their records. 

For companies with high transaction volumes or complex accounting systems, it may be necessary to reconcile bank accounts more frequently. This can help ensure that the company’s records are up to date and accurate and can also help prevent fraud or embezzlement. 

What is the bank reconciliation process? 

The bank reconciliation process involves several steps, including:

  1. Gathering the necessary documents: This includes the bank statement, any receipts or invoices, and the company’s financial records.
  2. Comparing the bank statement to the company’s records: Go through each transaction on the bank statement and compare it to the company’s records. This includes deposits, withdrawals, fees, and any other charges. 
  3. Identifying any discrepancies: If there are any differences between the bank statement and the company’s records, investigate the cause of the discrepancy. This could be due to a timing difference, a mistake in recording a transaction, or an unauthorised transaction. 
  4. Adjusting the company’s records: Once the cause of the discrepancy has been identified, make the necessary adjustments to the company’s records. This could include recording a transaction that was missed or correcting an error in recording a transaction. 
  5. Reconciling the bank account: Once all the discrepancies have been identified and corrected, reconcile the bank account. This means that the bank balance and the company’s records should match. 

Conclusion

In conclusion, the bank reconciliation process is a crucial financial process in accounting and bookkeeping. It helps to ensure the accuracy of a business’s financial records, detect any errors or fraud, and prevent discrepancies from accumulating. Bank reconciliation should be done at least once a month, although it can be done more frequently if necessary. The bank reconciliation process involves several steps, including gathering the necessary documents, comparing the bank statement to the company’s records, identifying any discrepancies, adjusting the company’s records, and reconciling the bank account. By following these steps, businesses can ensure that their financial records are accurate and up. 

Legal advice

If you need further assistance or advice, you can always contact Legal Kitz to assist you. To arrange a FREE 30 minute consultation with one of our highly experienced solicitors contact us at info@legalkitz.com.au or 1300 988 954. Additionally, you can also check out our sister company – Business Kitz’s Subscriptions to access our full range of legal, commercial and employment document templates to begin your business with a solid foundation that ensures compliance.