Why is bank reconciliation necessary?

Bank reconciliation is an essential part of the internal controls of a business mainly in terms of recognizing recording mistakes and fraud. The bank reconciliation procedure offers an independent verification of the accurateness of the accounting records of the business and must be completed before preparing the financial statements.

Why do we require to do bank reconciliation?

The bank reconciliation requirements to remain completed frequently to independently confirm the accounting records of the business. The bank reconciliation explains the differences between the business 'Cash at Bank' account balance and the balance presented on the bank statement. Both the business and the bank keep accounting records in relation to the particular same cash at bank transactions. These cash transactions contain deposits, cheques paid, electronic funds transfers and bank/government charges. Utmost differences between the two sets of independent accounting records can be clarified through timing differences. i.e. the time difference between writing, posting and recording the cheque and the actual cashing of the cheque with the bank.

Other differences occur since sometimes on set of records is uninformed of cash transactions that the other has recorded. i.e. cash receipts that the business might have recorded but not yet banked or bank charges that the bank has paid from the bank account of the business but not yet informed the business. Also, the differences could remain clarified through recording mistakes or even deceitful activity i.e. a person records cash receipts in the business records but does not bank the cash in the business bank account.

Another reason for doing bank reconciliation is to authorize the amount of money that the business essentially has available. The cash amount recorded on the bank statement might not necessarily be the amount that is available for the business to spend. This is due to the fact that the bank does not know about the cheques that have been paid but not yet presented to the bank.

Before preparing the financial statements, your accountant will confirm the cash accounting records of the business through completing bank reconciliation. If the differences between the 'Cash at Bank' account in the business accounting records and the bank's accounting records as shown on the bank statement can be explained by the bank reconciliation procedure, then the accountant has increased confidence in the accurateness of the business accounting records. The bank reconciliation is also required by auditors who check the accurateness of the financial statements of a business. These audits might be conducting for tax, funding or reporting purposes.

In summary, the importance and need for bank reconciliation might be given as follows:

• The bank reconciliation procedure assistances recognize any mistakes committed by the business or the bank (rare)
• The bank reconciliation assistances the business recognize the actual cash funds available to spend
• The bank reconciliation will help recognize any deceitful activity in relation to the cash assets of the business
• The bank reconciliation might also show any excessive delay in the clearance of cheques.
• Balanced bank reconciliation offers confidence in the accurateness of the business accounting records
• The bank reconciliation is obligatory by the auditors of the financial statements.

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