purpose of bank reconciliation process
Purpose of a Bank Reconciliation Process
Understand the purpose of a bank reconciliation process will help you avoid panic attacks and frantic phone calls to the bank when your bank statement seems to be misleading.
- Entries counted in the bank statement, not reflected in the account books.
- Entries made in the books of accounts, that are yet to be known to the bank.
- Bank charges and fees that are directly deducted from the bank's side, are mostly only known by the business when the bank statement arrives.
- Bank's collection of receivables, on the business's behalf, does not get recorded in the books, till the actual bank intimation of receipt, arrives in the form of a bank statement.
- Any deposits made, directly in the bank account, without intimating the business, are recorded in the bank statement, but obviously not in the account books.
- Any interest earned on the bank balance is something that does not get calculated on the business's side, and hence does not get recorded in the books till an official intimation arrives.
- Any errors from the bank side get noticed only after the arrival of a bank statement.
- Outstanding checks that are yet to be encashed or settled from the bank's side, i.e. checks that are still in transit, get recorded in the books but are only accepted by the bank once the settlement is done.
- Any bank errors, either positive or negative, sometimes get reflected in the accounts but not in the bank statement.
- Any deposits in transit that were recorded on the account books are only recorded in the bank statement once they are cleared
- Bank reconciliations prevent overspending by keeping strict accounts of cash outflows. They also check for any overcharging of fees, done on the bank's side.
- They aid in the timely correction of bank errors. They also check duplication of transactions.
- They help in tracking and correcting employee errors. Regular bank reconciliations help in avoiding payment problems and delays due to insufficient balances.
- It puts an active check on the embezzlement of money and ensures responsible accounting.
- They help in reaching the correct account balance figures and this provides external auditors with easily verifiable documentation.
- If the process is done regularly, it can reduce accounting errors drastically and makes the finding of missing purchase and sales invoices, easy in the accounting system.
- They make it easy to identify whether the accounting errors are actual errors or errors of a timing mismatch.
- They make it possible to keep track of checks that are cashed, separate from those that are outstanding or in transit.