Table of Contents
In this article, we explain everything you need to know about the bank reconciliation process: what it is, why it is important, how to audit it, etc. And, in addition, we show you an example of reconciliation of bank accounts carried out manually.
Table of Content:
1. Financial control in the company
2. What is bank reconciliation
3. Benefits of a bank reconciliation
4. Who is responsible for making bank reconciliations
5. Procedure and practical example
6. Good practices
7. Infographics: How to solve the most frequent problems of a bank reconciliation
8. Audit a bank reconciliation
9. Automated bank reconciliation
Financial Control in the Company
The financial control is a very generic concept that can be used in an organizational context for evaluating the overall performance against a strategic plan. Focusing on an administrative level would be, as defined by Stephen Robbins, of “a process consisting of monitoring the activities to make sure that they are carried out as planned and adjusted to the planned activities.”
Therefore, financial control refers to the state of business finance, allowing the directors of finance, or the companies themselves, to detect and correct possible deviations that are impacting on the allocated budgets.
The main objectives of this control over company finances would be:
- Diagnose problems, deviations and alterations on finances.
- Communicate these problems to the different areas in an understandable and graphic way, providing the relevant reports.
- Finally, work together with these areas to correct the deviations, thus achieving a general control and a fit with the budgets, objectives and possibilities of each company, brand, business or organization.
Some tools of financial control are:
1) Bank reconciliation: Bank reconciliation is the comparison made between the accounting notes that a company has of its bank accounts and the adjustments made by the bank itself on those accounts.
2) Management accounting: Management accounting consists in the use, analysis and interpretation of the information obtained from financial accounting for the adoption of short-term decisions within the organization. It is subjective and orientates its applications towards those subjects that have decision-making power over the company’s activity, improving the decision-making procedure through the use of accounting data.
3) Cost accounting: Cost accounting is a branch of accounting that internally accumulates information related to costs and has the purpose of predetermining, recording, accumulating, distributing, controlling, analyzing, interpreting and reporting production costs, distribution, administration and financing for the internal use of managers.
What is bank reconciliation
It is a process that consists in comparing the records of the operations of the bank account of the auxiliary newspapers (or main books), with the movements registered in the banking entities, shown in the bank statements that they issue, to proceed to make the corrections or necessary adjustments in the records or books of the company.
It is a necessary process since it is quite usual that the balance of the bank accounts and the balance of the bank statements do not match the books of the company.
The bank reconciliations are not intended to match the balances of banks that the company has registered with those of the extracts of those accounts. Its purpose, on the contrary, is to clearly identify what has generated the difference.
The bank reconciliation is a process that, although not mandatory, is highly recommended for any company, regardless of its scope, size or type. In fact, most companies do it regularly.
Benefits of a Bank Reconciliation
Bank reconciliation turns out to be a slow and tedious process, so many companies decide to ignore it and not do it. But the advantages of performing this task periodically are important for the business. We list them below:
- Better control of economic resources:
The fact of checking periodically, usually monthly, bank statements and accounting, allows us to have control over the state of the company’s accounts. We are certain that our accounting information is true, and therefore, reflects a reliable picture of the economic and financial status of society.
- Accounting up-to-date:
This process forces us to keep the accounting notes up to date, so it establishes a more controlled work dynamic.
- Security in front of an inspection:
The bank reconciliation allows us to detect errors or mismatches in accounting, and identify their origin and then solve the problem. Thus, in case of an inspection, we can be sure that the accounting reflects the reality, there are no mismatches and it will be more likely that there will be no problem.
- Quality information in decision making:
Information is a very valuable strategic resource. The more and better the information we have, the better the decisions that can be made. Therefore, bank reconciliation assures us that we rely on truthful and real information, as well as updated.
Who is responsible for making bank reconciliations
The person who will have to carry out the bank reconciliation process every month will be the same one that deals with accounting. The staff of the accounting department is the one who best knows the accounting situation of the company, so it will be much easier to detect errors, problems, dismissals, notes to pass, etc. In case of SMEs that have outsourced the accounting department through an advisory or consultancy, they will have to be asked to also perform this task, and to send the result to the company for verification.
Whether done internally or externally, it is important that the result of bank reconciliation does not simply stay in a drawer. The director of the accounting department will have to approve the resulting document, and in case the company so stipulates it or deems it necessary, the document can follow the chain of command and be presented to senior positions.
Bank Reconciliation Example
The first document we need is the bank statement of the period we want to reconcile. It is usually done from month to month, but it can be done less time if necessary.
As you know, before starting to reconcile a period, for example a month, the accounting has to be up to date, to avoid having to reconcile several times. In this case, we review the ledger of the company.
Most companies have several bank accounts, so we have to verify that we are reconciling information from the same entity and the same account.
The last document that we will need is the bank reconciliation of the previous month, to check the final balance, and in case of finding any mismatch to be able to verify if its origin is in the month that we reconciled or we have been dragging it from previous periods.
With this information, we will proceed to fill in the reconciliation document.
We propose a series of tricks and tips to help you save time in this procedure, and thus improve its efficiency:
- Information and documentation:
First of all, it is essential to have all the necessary information and documentation at hand. As in a puzzle, if we want to detect the missing pieces, those that are wrong or those that are badly located, we need to have as many pieces as possible and thus have a better view of the whole. In addition, if part of the information has not been registered before starting the process, we will have to do it several times, increasing the time we will have to devote.If necessary, therefore, we must demand documentation whom appropriate, such as if we’re missing some of the travel expenses company commercial, and proceed to register.
- Do not forget the box:
The boxes are also part of the company’s treasury, so if we do not take them into account, bank reconciliation will be much more difficult. It is advisable to make a triple square periodically, with the real box, a cash book and the cash account. This minimizes the possibility of finding errors.
- Reconciliation by tranches:
It is advisable to start the bank reconciliation by checking the final balance of the previous month, and if necessary even longer. This will be useful if you have posted a movement on a date before the previous balance of balances. In this way, if we encounter an error, it will not be necessary to review it all point by point, but we will check by sections to find out in which month the mismatch occurs.
- Analyze the mismatches:
Often the problem in bank reconciliation usually comes from “typical” errors, such as:- Duplicate a note, so the mismatch will be the same amount as the point in question.
– Do not count a movement, which will also give a mismatch of the amount of the forgotten note.
– Mistake when placing the comma, which produces a mess whose figures add up to 9. For example, if instead of € 12.40 we put € 124.0, the check will be € 111.60. If we add the digits 1 + 1 + 1 + 6 = 9.
– Wrong with the order of the digits of a digit, which, like the previous case, produces a mismatch whose figures add up to 9. For example, if instead of € 974 we put € 947, the difference is € 27, and when adding the digits 2 + 7 = 9.
Before wasting time reviewing point by point, we can try to identify the source of the mismatch thinking about these types of errors, looking carefully at the amount, and checking if we can relate it to the amount of some other movement. This will save us time and headaches.
- Banks are also wrong: While it is unusual, banks may make a mistake. It can happen that they charge us an incorrect amount or that they enter an incorrect amount, a concept that does not apply to us, that they are mistaken of account at the time of making an income or a payment if we have several accounts in the same banking entity, etc. Therefore, in case of detecting an error that you do not find justification or about which you have doubts, consult your bank.
- The conciliatory items, the last resort: Putting the mess in a conciliatory game and forgetting it seems a very easy and tempting solution. But the mess will still be there, so it is not a real solution. If they accumulate in excess, bank reconciliation will no longer make sense, since accounting will be far from the real situation, and it will be increasingly difficult to resolve this mess.We must claim bank account settlements that we have not received, invoices and tickets that have not reached us to verify that, as we said in the first point, we have all the information and all the documentation that we need, and that the accounting is at day.
How to solve the most frequent problems of a bank reconciliation. You are making the bank reconciliation of the expenses of the month and you find a difference between the balance of the accounting book and the balance of the bank statement. And now that?
Audit a bank reconciliation
The internal audits are important in any business, to check that a given process, system, project or product is correct. This is also applicable to bank reconciliations. But how to audit the bank reconciliation of a company?
To begin, we need a copy of the bank reconciliation of the month we want to audit, another copy of the corresponding accounting activity and a copy of the bank statement of the month in question.
It is essential to start the audit with a triple verification, comparing the balance of the three documents and making sure that it is correct. If a conciliation process has been necessary, we can assume that we will find some difference between the balances, so we will then have to verify that this difference is justified and controlled.
The next step is to review each transaction in the bank account and verify them in general accounting. To facilitate this task, a check mark can be placed on the hard copy of both documents next to each item checked. It should be noted that there are tools that automate this process or at least part of it.
At the end of this process, we have to pay attention to the elements that are not reflected in one of the two documents, to verify that they are correctly reflected in the conciliation document, together with a description of their reason. We can find, for example, deposits that have been posted late in the account, or checks issued that have not been cleared by the bank.
Finally, we will verify that the sum of the reconciliation items is equal to the difference between the final balance of the bank account and the final balance of the general accounting.
Automated bank reconciliation
Many times, bank reconciliation is considered as a more heavy and slow administrative task, with little value for the company, when in reality it is a management and control tool that can provide important information about the business. Therefore, it can be very beneficial to automate this task.
The main benefit, but not the only one, of automating this task is the reduction of the time it takes. This means having to spend less time and less staff for this process and therefore increase its efficiency. An improvement that, without a doubt, is also an economic improvement even if it is indirectly.
A benefit or improvement derived from the previous point is the optimization of the frequency with which bank reconciliation is carried out. Being a much more agile task, it can be done more often. In this way, the ability to react to errors or mismatches that have arisen is increased, and being more recent, it is also easier and faster to find what has caused them and give them a solution.
In addition, as with any other process of the company, if it is done manually and based on paper it is easier for errors or misses to occur, for any document to be lost, etc., than if it is done digitally. This avoids the “human failure” factor, for a more accurate and comprehensive result of bank reconciliation.
Today there are much softwares that allows the automation of this process. Which allows you to import and add bank information to your platform. So you can automatically reconcile the expenses of business trips paid with a business card. The software will reconcile the expenses with the corresponding payments, identifying and differentiating the expenses of each employee.
The application will also detect the expenses without associated payments, such as cash payments, errors in the capture of a ticket, etc., or payments without expenses, thus allowing to identify the missing supporting documents or even possible internal fraud. Thus, payments for business trips are reconciled with the expenses reported by each user or worker in an easy, simple and automated way.