Why monthly bank reconciliation statement is important?

 

Mr. XYZ of your company erroneously put a $100 invoice in accounts payable. Instead of recording it in accounts receivable. In simple terms, he recorded it as an expense. 

Sounds like a common accounting error, right?

Now replace $100 with $10,000 and imagine Mr. XYZ made the payment. Your heart must have skipped a beat. This was an error of entry reversal. Similarly, there are many accounting errors. For instance, error of principle, exchange, omission, commission, duplication, etc.

In order to solve these errors, you need to prepare a Bank Reconciliation Statement

 

What is a Bank Reconciliation?

 

BRS is a summary of banking and business activity that reconciles an entity’s bank account with its financial records,” Investopedia stated. It compares your records to the bank records. Besides, it helps to discern exact bank balances on a certain date. It addresses accounting problems in real-time. 

Infrequent reconciliations leads to frauds, unauthorized withdrawals, and bank errors. Moreover, chances of bouncing cheques increase. Thereby, your relationship with clients, suppliers, and partners strains. Therefore, the fee and payment term also increases. 

 

What is the process of the BRS?

 

Initially, you need to compare the cash balance of your bank statement to that of company’s records. If they match, voila. Otherwise, the monthly BRS will come into the role. 

Firstly, identify and highlight the tiniest differences between both statements. For example, you may omit a transaction. But, the same can be there in the  bank’s statement. Secondly, ensure you have added all interest income and bank deposits. In case, some deposits are in transit (recorded in your company’s record), add that in the bank statement’s cash balance. 

Usually, bank fees & service charges, or outstanding checks are in the bank statement but not in the company’s record. In the third step, subtract these fees and charges. Also, consider the issued but not yet cashed cheques to a third party. Subtract the cheque amount from the bank balance. 

Lastly, calculate & compare the balance of both bank & company records. If the balances don’t match, either there is the chance of fraud or some accounting errors. This process increases the accuracy and efficiency of accounting department. Here are the 4 reasons to convince you that a  monthly BRS shields your business.

 

Why is monthly BRS important?

 

  • Validates cash flow

Tracking expenses is important to ensure that a business is earning good profits. One needs to carefully record all the expenses such as rents, utilities, bank charges, etc. In case bank service charges have increased, bank reconciling will help you ascertain the effect on cash flow. Moreover, lenders and investors consider your BRS to evaluate your financial stability.

  • Recorded expense help in tax savings

While calculating tax to be paid at the end of each year, all you look for is recorded expenses. Monthly BRS helps to keep track of all the expenses like depreciation, travel expense, and other information. As a result, these recorded expenses help in the availing of deduction. 

  • Save Money

How many subscription and their timelines can you remember every month? It seems hard to keep an eye on every new subscription in the tech-driven world. But monthly BRS reminds, records and keeps a tab of all such expenses. They help you in discovering all those forgotten free trials which are now automatically charging you every month.  

  • Guards from Fraud

When an employee alters or steals a cheque, mostly a BRS process identifies it. So, you should have a separate employee to reconcile both the bank statement and your records. Moreover, a fraudulent charge on the company’s credit card alerts of any loss of your credit card or its credentials. So a monthly bank reconciliation secures you from frauds before losing a great amount.

 

Being a business owner you have a lot to do on your plate. Finding time to do monthly bank reconciliation can be too difficult.

At SKB Accounting, we monthly reconcile your business to keep your bank account, accounting  up-to-date. To know more about this, schedule a meeting with us now. 

 

-by Dipali Nishad