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Cash Flow Caution: A Guide to Bank Reconciliation

Cash Flow Caution: A Guide to Bank Reconciliation

Bank reconciliation is a process that is used to determine whether your company’s books are precisely in line with your bank statements at a given bank. It may not imply anything serious, it is important to sort out any discrepancies. The bank reconciliation process also ensures that your finances are in order and you have a complete picture of where your business is financially.

For business owners and individuals alike, it’s crucial that your finances are as accurate as possible. It’s important to know where you stand financially, how much disposable income you have and what percentage of your money should be designated to bills and other expenses. With this information at your disposal, you will be better able to plan for your financial future with confidence.

Let’s take a closer look at bank reconciliation and what it entails.

Why Is Bank Reconciliation Necessary?

Bank reconciliation is necessary for several reasons, including any factor that would cause a gap or error between your books and your statements at the bank. For example, there may be some checks that have been issued by your business that have not been cashed yet. Or maybe, on the business side, your books may not yet have records of more recent banking transactions. Naturally, it can also be caused by a simple error.

It is important to take quick notice of and fix any discrepancies. It can prevent small problems from getting out of hand.

How Can It Be Solved?

If you have ever balanced your own checkbook, then the process of bank reconciliation is not necessarily foreign to you.

In most cases, bank reconciliation can often be quite easy to solve. Examining the most recent transactions for both bank statements and your books will likely provide you with the information you need to spot the discrepancy. If this is not the case, then you may be required to filter through your books and statements up until the time of your last bank reconciliation.

Compare your internal records with your bank statements on an individual transaction basis. Add deposits and deduct outstanding payments to find both the adjusted bank and adjusted company cash balances. These two numbers should match when the process is complete.

While it is possible to complete bank reconciliation manually, this process can be handled much more easily when using updated accounting software.

Beneficial To Stop Fraud Early

If you suspect that fraudulent activity is occurring in your business, bank reconciliation can assist in your efforts to stop it. Going through transactions item-by-item can help you catch checks that may have been issued without authorization or with alterations to them. Missing deposits and unauthorized transfers will also be easy to spot.

Bank reconciliation can also be useful for highlighting the potentially problematic ways in which your company manages cash flow and accounts receivable. The financial health of your business is strongest when you are accurately aware of how much cash is currently in company accounts and when basic transaction information is entered and recorded into your bookkeeping systems properly. Books full of errors can lead to bounced checks, overdraft fees, and other serious problems for any business to face.

There’s Nothing to It

After completing the process of sorting out these discrepancies, you will complete a bank reconciliation statement, which is a document that ensures the balance in your company’s books corresponds to your bank statements. Make sure to complete the reconciliation process regularly to avoid any persistent accounting errors.

Some companies choose to do this monthly, while other organizations do so daily. While it will hopefully be unnecessary in your case, this process can also be useful as a double-check against fraud in your company, especially if your company has multiple business bank accounts.


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by Rebecca Jones // Contributor to Businessing Magazine.

Opinions expressed by contributors are their own.