Bank reconciliation is a process to match the balance on the record with the report made by the bank. The purpose of this activity is as a form of internal control and to prevent fraud. Read more below!

What is Bank Reconciliation?

Bank reconciliation is the process of matching the balance in an entity's accounting records for a cash account with the corresponding information on the bank statement. The purpose of the reconciliation process is to ascertain the differences between the two, and also to record the changes to the appropriate accounting records. Bank reconciliations should be performed periodically for all existing bank accounts.
 
To ensure that the company's cash records are always true and accurate. If not, it is possible to find that the cash balance is much lower than expected or on hand, resulting in bounced checks or overdraft fees. Bank reconciliations will also detect certain types of fraud. If there is little activity in a bank account, then there is no need for periodic bank reconciliations, you should question why the account exists. It may be better to close the account and reallocate the remaining funds to a more active bank account.
That way, it will be easier to invest the remaining funds, as well as monitor the investment status for the future. Immediately do a bank reconciliation at the end of each month, when the bank sends the bank statement to the company containing the beginning cash balance, transactions for the month, and also the ending cash balance. It is recommended to do a bank reconciliation every day, because by completing a bank reconciliation every day, you can immediately find and fix problems. Specifically, a daily reconciliation will highlight any ACH debits from accounts that you do not authorize, then you can place a debit block on the account to prevent these ACH debits from being used to withdraw funds from the account without your permission.

It is highly unlikely that the company's ending cash balance and the bank's ending cash balance will be identical, since there may be multiple payments and deposits in transit at any given time, as well as bank service fees (for accepting checks, recording deposits, and so on), penalties (usually for overdrafts), and insufficient funds deposits that the company has not recorded. Further explanation of reconciliations will be discussed in the bank reconciliation journal below.

Purpose of Bank Reconciliation

Bank reconciliations are an important internal control tool and are needed to prevent and detect fraud. They will also help identify accounting and bank errors by providing a description of the differences between the cash balance in the accounting records and the bank balance position per the bank statement.

Supervising Cash Management

Bank reconciliation is used to compare the records we make with the bank records, the comparison is done with the aim of seeing if there are any differences between your two cash transaction records. The ending balance of your cash record version is called the book balance, while the bank version is called the bank balance.

Through bank reconciliation you can see whether the cash records made are correct and made carefully or not.

Knowing the Financial Condition

It is normal for there to be a difference between the two balances, and all you have to do is track and reconcile them with your records. If you don’t pay attention to these differences, you will end up with a substantial difference between the amount of cash you assume you have in your account and the amount the bank thinks you actually have in your account. The result can be an overdrawn bank account, bounced checks, and overdraft fees. In some cases, the bank may even choose to close your bank account.

Prevent Human Error

Even though using sophisticated tools, human error is still unavoidable or commonly called human error. The difference in the records between the bank and the company can occur due to human error. Routinely synchronizing the company's cash book with the bank will help you anticipate further human error in the future. If an error occurs again, it can be resolved immediately to prevent problems that will become more complicated. Making Financial Reports More Tidy By conducting bank reconciliation, banking and company report records for a certain period can be neater and more accurate. Bank reconciliation can also be a control center for every receipt or payment for a company. Be it payments in cash or non-cash.

Components in Bank Reconciliation

It should be noted that bank reconciliation has certain components. These components are very important and should not be missed because if there is one that is missed, the reconciliation theory cannot be applied. Here are the components of bank reconciliation:

Deposit in Transit

Deposit in Transit is cash that has been received by the company. However, the information has not yet been received by the bank so there is no recorded history. If this happens exactly in the fourth week of 1 month, of course it will not be a deposit for the bank. Because the money has not been recorded and still belongs to the company. The dynamics that become one item recorded in the bank reconciliation.

If we think logically, the logic is that if the bank deposits money not exactly at the end of the month or the fourth week, then the bank will experience a delay in recording. Because it is impossible to do the recording process if there is no deposit received. However, it is also possible that the deposit has been received on time, but the report from the company is late. This will also not be recorded by the bank so a bank reconciliation needs to be carried out.

Outstanding Check

The next component of bank reconciliation is Outstanding Check. This component can also be called outstanding check. It means a check that has been recorded by the company but has not yet been cashed. If this is not reported immediately, of course the bank will not record the report. Therefore, it is reasonable to conduct a bank reconciliation if there is a difference in nominal value between the company's records and the bank's records. Even though it has been cashed, it is appropriate to immediately make a report to the bank. So that there is an update of the latest cash records related to the company's financial information at the bank.

Non-Sufficient Fund Check

Non-Sufficient Fund Check is a component of bank reconciliation which is also called a bad check. This check will not be recorded in the bank because the company's balance is not enough to pay the check listed. For cases like this, the bank will still allow the disbursement and also reduce the company's account. While the company itself will be asked for a payment request for the disbursement process.

Current account service

The last component is giro service. Giro service is interest that has been estimated by the bank but the company has not been able to record the transaction in its financial records.

Procedures in Bank Reconciliation

1. Comparing Cash Balances

The first procedure in bank reconciliation is to calculate by comparing the company's cash balance with the bank account. Comparing by analyzing the bank statement obtained each month. Generally, if a company opens a checking account at a bank, then gets a bank statement at the end of each month. In it, there will be various transactions such as deposits, checks, service fees and others. Even the company's cash balance will also be there. This bank statement will be compared with the company's cash records.

2. Record all transactions made by the bank

Transactions that come in and are recorded in the Bank will be digital and 'automatic' adjusted to those stated on the bank statement. However, you will still be able to track it by referring to the bank statement. Therefore, record all transactions that appear on the bank statement and in the cash book in different chapters. Then after that, follow up if there is a striking difference in the comparison.

3. Checking Transactions Still in Process

It has been explained previously that it is very difficult to match financial records between the bank and the company's cash. The problems that occur can vary, such as late deposit reports or because there are circular checks. Actually, it is not that it is not recorded but is still in the recording stage. Therefore, the company must conduct an investigation related to this. The method is to contact the relevant parties to ask questions about the clarity. Generally, the cause of the difference in nominal value between the bank and company records will be known. From these things, adjustments will emerge.

4. Calculate the Balance Difference in the Worksheet

The next procedure is to calculate the balance difference in the worksheet. This stage is the process and results of the calculation that can be recorded on the worksheet. Keep in mind that make sure the nominal value of the calculation results explains the details of the actual difference. So that there will be a solution related to the problem of data not being synchronized in the records. If this is indeed successful, it means that the bank reconciliation is complete and finished. If there is still a difference that makes you doubtful, then an accumulation or recalculation must be carried out more carefully and in detail. Therefore, in this procedure, financial data must be valid because it is the most influential factor.

5. Do Tracking and Check Again

The last procedure is further tracing and rechecking. Checking especially on what is considered odd or something like that.

Conclusion

Bank Reconciliation is one of the most important things in a company's financial affairs. Bank reconciliation is a way to ensure that the cash account balance in the company's ledger is complete and accurate with the bank account. If there is a difference in the check with the company's error, then an adjustment will be made as stated in the bank reconciliation.

The difference in balance can be due to giro services, money order receivables, deposits on transit, bad checks and outstanding checks. After reading about what is meant by bank reconciliation, hopefully it can help you understand what bank reconciliation is more deeply. That is the explanation of bank reconciliation, you can also read other GIC articles to get more knowledge, such as the explanation of the Trading Course, only in the GIC Journal. Make sure to download the GIC Mobile Apps on the Google Play Store and the  Apple App Store. Register here to trade now !!!