Financial management remains a cornerstone for the success of Canadian business. As we navigate through the intricacies of fiscal responsibilities, one fundamental practice that continues to hold its relevance is bank reconciliation.
A company’s investments in marketing, R&D, and technology depend on the amount of cash it has available. This is why a business needs to have an accurate picture of the money that is coming in and going out. Bank reconciliation allows businesses to determine how much they have in their accounts and manage their Accounts Payable and Accounts Receivable accordingly.
The process involves getting the monthly bank statement from a company’s bank and then matching each of the internal accounting records that show up in their cash book or accounting software with the checks and electronic payments listed on the bank statement. The result is that any differences are caught and corrected.
It’s also a good way to catch any ongoing errors, such as cheques that aren’t clearing or fees charged by the bank that needs to be recorded in the company’s books. These are a lot easier to notice when companies reconcile their accounts regularly.
The financial ecosystem is rife with transactions, and discrepancies can easily slip through the cracks. Bank reconciliation acts as a vigilant watchdog, promptly identifying any inconsistencies between a company’s records and its bank statement.
In the digital age, where cyber threats loom large, bank reconciliation becomes a crucial tool in detecting any unauthorized transactions or potential fraudulent activities.
Maintaining accurate financial records is not just a regulatory requirement; it’s a strategic imperative. Bank reconciliation ensures that a company’s financial data reflects its true financial position, facilitating better decision-making.
Additionally, timely reconciliation helps businesses maintain an accurate picture of their cash flow. By identifying outstanding checks or unclear transactions, companies can optimize their cash management strategies for improved liquidity.
Doing a bank reconciliation regularly enables companies to know exactly how much money they have. So, they can make smart spending and saving decisions. It also helps businesses maintain a positive relationship with their bank.
To perform bank reconciliation, a company should start with its record of cash transactions in its accounting system and cross-reference these with the bank’s list of activities for the same period.
After adjusting the balance in the business’s accounting records, it should then create an adjusted bank reconciliation statement. The ending balances of the two statements must match. To do this, the company must prepare a record of adjustments to its accounting books (general ledger). These are called adjusting journal entries.
Adopting a proactive approach by reconciling accounts regularly—preferably every month—ensures that any discrepancies are promptly addressed, preventing them from snowballing into larger issues.
Additionally, implementing a segregation of duties is a fundamental internal control measure. By dividing responsibilities among different individuals, businesses can reduce the risk of fraudulent activities and errors going unnoticed.
Use technological tools available for bank reconciliation. Automated reconciliation software not only expedites the process but also enhances accuracy, leaving less room for human error.
In a dynamic business environment, staying updated on the latest financial regulations and technologies is paramount. Furthermore, providing ongoing training to finance teams ensures that they are well-equipped to resolve the issues.
Hence, bank reconciliations help you spot common accounting errors like addition and subtraction mistakes, missed payments, and double payments.
