The advantages of bank reconciliations

  1. checkbook

What is bank reconciliation?

Bank reconciliation is a tool for managing financial transactions. Simply put, a procedure performed by businesses that matches the balances in the company’s cash account records against the corresponding entries in a bank statement. This process is generally done on a  daily basis. It helps in finding discrepancies and making adequate changes in the accounting records as needed.

Here are some advantages of bank reconciliations:

Detects fraud

Bank reconciliations help in matching the checks disbursed by the company with those that have been cleared on the company’s bank statement. A careful scrutiny brings to the fore any fraudulent activity like making payments to unauthorized vendors or employees, amending check amounts, amending check details etc.

Find out unauthorized entries

Regular bank reconciliations help spot unauthorized entries like void checks being presented. These are checks that are usually presented to the bank after their expiry date. They also help spot checks on which “Stop Payment’ directive had been issued to the bank. Any unrecognized ACH entries or other fraudulent charges can also be correctly identified through regular bank reconciliations.

Identifies errors

All wrong entries can be checked by comparing the company’s records through its accounting software with the bank records. These entries can be subsequently rectified and any processes that caused these errors suitably amended.

Prevents overdraft

There is a lag between cash outflows and inflows in a company. The cash outflows or payments to employees and vendors happen at a different pace as compared to the cash inflows from clients. This time lag varies from a few days to weeks. It can adversely affect a company that has low cash reserves. Regular bank reconciliations take care of this by letting the management postpone some payments thus preventing cash overdrafts, bounced checks and any relevant fees and interest that may be levied due to low balance maintained in the bank account.

Identifies Float

All uncleared checks can be suitable noted and accounted for by the company through bank reconciliation. This will help in better cash flow management.

Better collections

Accounts receivables can be better managed with bank reconciliations. Any receivable from a client is no longer outstanding as soon as the check is cleared by the bank. The payment would be accounted for as received. Any check from a customer that does not get cleared in the bank signals to the management to use more aggressive measures to get that payment.

Bank reconciliation is thus a handy tool that can help in avoiding accounting errors as well as embarrassing situations for companies due to oversight.

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