Five (5) importance of Bank Reconciliation statement

A business that relies on banks needs to examine the statements periodically to ensure that the money in it is accurate. Failure to do that will lead to loss of sales income, uncorrected errors, and fraud. In this article, we explain the importance of a Bank reconciliation statement.

1. What's Bank statement

A bank statement is the statement issued by a bank upon request by a customer showing the total withdrawals, deposits, charges that transpires between the bank and a customer. It is the ledger account a bank keeps for each customer. Therefore, to the bank it is a liability account. 

2. Bank account defined

Bank account is a page in the general ledger of a business that contains all the business dealings with a particular bank. In theory, the bank account is a column in the cash book. However in modern times, a separate ledger account is opened for bank transactions. The reason might be that a business might have more than one bank account. It might have an account with First Bank, Polaris, or more. 

A company maintains this account and ensures that all money deposited or withdrawn through the bank is posted to the account with necessary source documents. Therefore, it is expected that the balance in the bank account in the ledger of the entity equals the balance in the bank statement. When there is a difference, reconciliation becomes necessary.

3. Bank reconciliation statement explained

Reconciliation of the bank statement and entity's bank account in the ledger becomes necessary when there are discrepancies. To do this, the staff responsible for monitoring them will check to know what transactions in both and those that cannot be found on them. Then a reconciliation is done to correct the errors. Then, journal entries are passed and a reconciliation statement is prepared to show the causes of the difference and how they are reconciled to balance the accounts.

4. Five (5) importance of bank reconciliation statements

4.1 Fraud detection

During reconciliation, the accountant may find an act of fraud by a staff or manager during reconciliation. For example, the cashier responsible for posting to the bank account in the ledger of the entity may have posted sales that cannot be found in the bank statement. This should be investigated to know if it was an act of fraud or a mistake. 

4.2 Correction of errors

Errors might be in two ways. Errors by the bank staff or errors in accounting within the entity. During reconciliation, the accountants can detect the errors and make necessary corrections. If the error was made by the bank, a letter will be sent to the bank for correction. However, if it occurs within the entity, a journal entry will be used to correct them.

4.3 Cash control

Reconciling bank statements and an entity's bank account in the ledger book is one of the ways of controlling cash. Cash and cash equivalents are important resources of an entity. Poor management of them can increase the entity's liquidity risk. Doing these will also enhance the financial statement, building investors and other stakeholders trust and confidence of the entity

4.4 Track bank charges

A primary importance of bank reconciliation statements is the tracking of bank charges. Of course, bank charges are a cause of discrepancies between the bank account and bank statement. However, knowledge of the actual charges by the bank is important in making decisions by the entity with regards to costs and revenue.

4.5 Accuracy of Revenue and receivables

As stated earlier, errors might occur in one way or the other. It is possible for a customer payment for a sale through the bank to bounce. Also, some customers may claim that they have made payment to the entity's bank. To ensure accuracies of revenue and receivables from debtors, periodic reconciliation cannot be avoided. 

5. Conclusion

In final words, a bank reconciliation statement clears the differences in the bank account and bank statement. The reconciliation should be done periodically, at least once a month. The importance of doing so cannot be watered down since it helps in cash control and ensure that the total bank charges for the period is known.