Cash is the most vulnerable asset in a business. Performing bank reconciliations is an internal control mechanism that can help identify unusual transactions that might be caused by simple accounting errors or worse yet, fraudulent activity.
It’s extremely important to perform such reconciliations on a monthly basis to properly identify and stop nefarious or questionable activity. Someone should be looking closely at checks, transfers and other types of transactions on a regular basis. For the process to work most effectively, it is necessary to segregate the duties of those responsible for the accounting and authorizing of bank transactions from those that are responsible for preparing and monitoring monthly bank reconciliations; otherwise, fraud or theft by employees can be easily hidden.
When performing a bank reconciliation, you are actually ensuring that all transactions have been recorded correctly in your internal accounting system and that they match the transactions that actually cleared the business bank account. Most accounting systems provide bank reconciliation capabilities, but if not, below are four easy steps to perform a manual reconciliation:
- Compare the bank statement ending balance to your book cash balance as of the same date.
- Add any bank-only transactions to your book balance, such as bank fees and interest earned.
- Subtract any checks or other disbursements from your bank balance that were recorded on the books, but remain uncleared (or outstanding) as of month-end. Likewise, add any deposits in transit.
- Compare your adjusted bank balance to your adjusted book balance.
Since you’ve already adjusted the balances to account for common discrepancies, the numbers should now match one another. If you find that the adjusted balances still do not match, then it’s very likely an accounting or bank error has occurred that needs to be investigated further.
The importance of bank reconciliations cannot be overstated. It not only impacts the accuracy of the financial statements but can also affect performance metrics, cash flow management and tax reporting.
For more information, contact Jeanine Bombard, General Ledger Specialist, at or 716.633.1373.