Regarding their capital and liquidity needs, financial institutions must take credit risk into account. As a result, maintaining accurate records of bank transactions is crucial. The significance of bank reconciliations cannot be emphasized when determining the market worth of a company’s assets and liabilities. Bank reconciliation reports may be used to verify important figures in the context of financial statement analysis to see if they fall within anticipated ranges. If a figure sounds strange or if there are unusual transactions, the bank may have neglected to correctly record the transaction or there may be gaps in other data. It emphasizes the need for firms to do reconciliations carefully. Let’s learn more about bank reconciliation and how crucial it is for analyzing financial statements. Read More: Tom Von Reckers
What is bank reconciliation?
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The process by which a firm compares its transactions recorded in the accounts books with the bank transaction reports is known as bank account reconciliation. Businesses may use it to verify and check the cash inflows and outflows from different transactions. Businesses may improve their decision-making by understanding their financial status.
Why is bank reconciliation important?
It’s critical to comprehend a company’s financial situation, cash flow, and debt repayment capacity. A company that is having cash flow issues may need to reduce some of its transactions and costs in order to stay afloat. Unfortunately, some companies often disregard the value of a bank reconciliation before doing an examination of the financial statements. The following are some of the primary factors that make bank reconciliation crucial:
Helps in catching frauds-Â
It is relatively easy to conduct fraud in huge corporations when several personnel have access to the account and may withdraw or deposit money. Due to an organization’s enormous scale, it might be difficult to identify petty financial thefts if a thorough bank reconciliation statement is not made. An excellent illustration of fraud would be if a manager asked a clerk to withdraw $100 for petty cash but the clerk changed it to $1000 instead. Minor errors would not be discovered until a proper reconciliation statement was produced even if the firm reconciles finances every day. Employees will not commit fraud if they are aware of the standard reconciliation procedure.
Avoids administrative problems:
By using bank account statements, business organizations may locate and fix insufficient recordkeeping infrastructure. Using this information, organizations may make decisions about how to manage their cash flow and accounts receivable, or change their record-keeping and accounting procedures. Reconciliation between banks and credit cards ensures that administrative process is constantly in place and that companies are aware of the amount of money in their bank accounts. If customers are aware of the amount of money in their bank account, this decreases the likelihood that a check will bounce and aids in the detection of banking mistakes.
The bank account reconciliation statement keeps track of all payments received and verifies whether they have been received or not. When the accountant submits several checks, it’s possible that some may be left over and deposited or included in the next month. A check that is delivered on the final day of the month will be recorded for the next month. In addition, by carefully comparing the two books, the company may determine whether one of its clients hasn’t paid yet.
Helps in catching frauds-
Without a single error or any extra services from the company, the bank deducts a number of penalties and fees from the account each month. In order to record these payments, a firm could be obliged to pay overdraft fees or get interest on their savings account. A firm will also have to pay fees if it has used some of the bank’s services. In this instance, the balances on both the company ledgers must be the same. A company must identify the cause of any differences and make the necessary modifications to make repairs if there are any.
How to Conduct Bank Reconciliation?
A reconciliation statement serves a very important purpose and must be prepared with the greatest care and objectivity. Compare the bank passbook with the bank records in order to compile a bank account reconciliation statement. The company is not obligated to provide a reconciliation statement if the balance is the same in both the internal bank book and the bank. If the same amount is not shown, however, there is a valid cause to suspect it. The causes of the discrepancy are investigated, and any missing or incorrect transactions and payments are then documented and corrected in the company’s books of accounts.
Financial statement analysis is done to determine the effectiveness and financial position of the firm after the books have been balanced and matched with the bank records. The right actions and choices are made to increase company efficiency and profitability based on the ratio analysis results.
Must Read: Why You Need a Business Loan for Your Small Business?
Conclusion
Financial statement analysis tools have been created to assist investors and financial institutions in confirming the correctness of financial reports in light of the significance of bank reconciliations. Investors may readily confirm a company’s general financial health and the quantity of money that is presently in each of its accounts by utilising these tools. Similar to other forms of financial reports, bank reconciliations provide financial organisations a uniform, impartial approach to submit important financial data to regulatory bodies.
