Credit risk is an essential consideration for financial institutions regarding their capital and liquidity requirements. Given this, keeping accurate records of bank transactions is paramount. When analyzing the value of a company’s assets and liabilities, the importance of bank reconciliations cannot be overstated. In the context of financial statement analysis, bank reconciliation reports can be used to corroborate key numbers to show whether they fall within expected ranges. If a number seems out of place or odd transactions occur, it may indicate that the bank has failed to accurately report transactions or that other data is incomplete. It makes it important for businesses to be diligent while conducting reconciliations. Let us understand more about bank reconciliation and its importance for financial statement analysis.
What is bank reconciliation?
Bank account reconciliation is the process through which a business matches its transactions recorded in the accounts books with the bank transaction reports. It helps businesses check and confirm the inflows and outflows of cash through various transactions. Businesses can understand their financial position and make better business decisions accordingly.
Why is bank reconciliation important?
Understanding an organization’s financial health, cash flow, and ability to repay debts is important. If a business is experiencing cash flow problems, it may have to cut on some of its transactions and expenses to avoid insolvency. Unfortunately, some businesses often overlook the importance of bank reconciliation before conducting a financial statement analysis. Some of the main reasons why bank reconciliation is important are:
Helps in catching frauds-
In large corporate organizations, where multiple people may access the account and withdraw or deposit cash – it is very convenient to commit fraud. Because of the great size of an organization, it is tough to detect small cash frauds unless a complete bank reconciliation statement is not created. A good example of fraud is if a manager requests a clerk to withdraw $100 for petty cash, but the clerk alters the amount and makes it $1000. If the company reconciles accounts daily, minor lapses would not be detected unless a proper reconciliation statement was completed. If employees are aware of the regular reconciliation process, they will refrain from indulging in any fraud.
Helps avoid administrative issues-
Business organizations can identify and remedy inadequate recordkeeping infrastructure through bank account statements. This can help businesses decide how to handle their cash flow and accounts receivables or alter their recordkeeping procedure and accounting practices. Banks and card reconciliation guarantees that the administrative workflow is always on the spot, ensuring businesses know how much money they have in their bank accounts. This reduces the chance of check bounce and helps catch bank errors, providing that they know how much money they have in their bank account, reducing the chance of check bounce and catching bank errors.
Tracks the payments received-
The bank account reconciliation statement captures all payments to confirm whether they have been received or not. When the accountant submits many checks, some checks may be left behind to be deposited or included in the next month. If a check is submitted on the last date of the month, it will be entered into the next month. In addition, if one of the business’s customers hasn’t paid yet, it can find out about it by comparing the two books thoroughly.
Keeps an eye on the bank fees and interests-
Every month, the bank charges numerous penalties and fees from a business account without businesses making a single mistake or providing them with any additional services. A business may be required to pay overdraft fees or be credited with interest on their savings account to record these fees. If a business has used some of the bank’s services, it will also be required to pay fees. In this case, both of the business ledgers must balance out so that both are the same. In case of any discrepancies, a business must find out the reason for such a mismatch and make proper adjustments to make corrections.
How to Conduct Bank Reconciliation?
A reconciliation statement is a very crucial function that requires utmost care without any bias. To create a bank account reconciliation statement, it is essential to compare the bank passbook with the bank records. If the same balance is shown in the bank and internal bank book, the business is not required to make a reconciliation statement. However, if the same balance is not shown, there is a good reason for it to be discovered. The reasons for mismatch are searched, and the missing or inaccurate transactions and payments are then recorded and adjusted in the business’s books of accounts accordingly.
Once the books have been balanced and matched with the bank records, financial statement analysis is conducted to understand the efficiency and financial status of the business. Based on the ratio analysis reports, appropriate steps and decisions are taken to enhance business productivity and profitability.
Conclusion
Recognizing the importance of bank reconciliations, financial statement analysis tools have been developed to help investors and financial institutions verify the accuracy of financial reports. By using these tools, investors can easily verify a company’s overall financial health and the amount of funds currently sitting in each of its accounts. Bank reconciliations are similar to other types of financial reports in that they provide an objective and standard way for financial institutions to report key financial information to regulatory authorities.