What is the reason for the difference between the bank statement and bank reconciliation?
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29 December, 2021 8 min read What you'll learn
Listen to the blog:CONTENT What Do You Mean by Bank Reconciliation? What is the Importance of Bank Reconciliation in Accounting? How to Prepare a Bank Reconciliation Statement? What are the Challenges Encountered While Reconciling Bank Statements? Why is Automation Required in Bank Reconciliation?
What Do You Mean by Bank Reconciliation?Bank Reconciliation is an important process in accounting in which organizations match their bank statements with the transactions that are recorded in their general ledger. Preparing a bank reconciliation statement helps businesses to eliminate possible errors in transactions or bookkeeping. Before digging deeper into the methods of bank reconciliation or the loopholes experienced by the accounting teams, let us first understand the basic terminologies that are used in bank reconciliation. What is the Difference Between Cashbook and Bank reconciliation?The difference between cash book and bank statement balance is that cash book balance indicates the transactions added on the organization’s general ledger while the bank statement balance indicates the cash balance on the bank statement. What is the Importance of Bank Reconciliation in Accounting?Bank reconciliation is important because it helps organizations identify possible errors in transactions that lead to a difference between the accounting records and the bank statement. A bank reconciliation statement also helps to identify potential fraudulent activities to safeguard the business against losses. Bank reconciliation ensures that your business’ cash balance is what you thought it is. If your book balance is different from the bank balance, your accounting team needs to sit down and thoroughly analyze both the records to eliminate the anomalies. These few reasons highlight why frequent bank reconciliations should be mandated: How Often Should Bank Reconciliation be Performed?Bank reconciliations should happen on a daily basis to eliminate any possibilities of frauds or financial irregularities. Usually, organizations reconcile the statement once a month. Monthly reconciliations might lead to a lot of anomalies in your bank balance and book balance, and it will keep piling up. That’s why bank reconciliation statements should be prepared accurately on a daily basis. How to Prepare a Bank Reconciliation Statement?Across the industries, these two popular methods are used to prepare a bank reconciliation statement: Finance and accounting teams usually go through the following steps to prepare a bank reconciliation statement: Step-1: Compare the bank statement with the general ledger Step-2: Adjust the bank statement Step-3: Adjust the cash balance Step-4: Compare the balances and Add Journal Entries if Required Now, the question arises: What is a Journal Entry for Bank Reconciliation?A journal entry represents the data that needs to be added to a company’s general ledger while performing bank reconciliation. This is because these data entries were present on the bank statement but not on the general ledger. A few examples of journal entries include bank interests, loan payments etc. To understand the step-by-step guidelines on how to prepare a bank reconciliation statement from scratch, read our blog on ‘A Beginner’s Guide to a Bank Reconciliation Statement Preparation’. What is the Formula for Bank Reconciliation Calculation?The formula for bank reconciliation is: (Cash account balance per your records) addition or subtraction ( reconciling particulars) = (Bank statement balance). What are the Challenges Encountered While Reconciling Bank Statements?Bank reconciliation is critical and there are multiple uses of a bank reconciliation statement. However, reconciling statements manually on a daily basis can turn out to be challenging. Let’s explore a few real-life challenges experienced by the organizations across the world: 1. Slow Process of Data InputAnalysts have to manually log into banking systems to pull bank statements, access the ERP system to analyze and match it with the cash balance. Doing this recurring activity could turn out to be a slow process due to the high manual intervention involved. 2. Possibilities of Error-Prone ReconciliationThere are higher possibilities of human errors while reconciling manually. This does not serve the purpose of improving the accuracy of transactions. 3. Lack of a Central System for AuditingAfter the reconciliation statement is prepared, it is important to store the bank reconciliation statement for auditing purposes. If reconciliation is paper-based, in that case, maintaining the audit trail can turn out to be tricky. Why is Automation Required in Bank Reconciliation?To ensure higher accuracy rates, organizations are slowly pivoting towards automation in the accounting process. Automation will rule out the possibilities of any manual errors while inputting the data, and reconciling the statement. Let us understand how automation would impact reconciliation and what is a bank reconciliation software or a bank reconciliation application? A Bank Reconciliation Software is a cloud-based solution that automates the process of bank reconciliation. With automation, your finance teams can access real-time balances from the general ledger, carry over information and open items from previous periods, and make comparisons from bank statements and invoices using the software. The accounting team can then sign these account reconciliations electronically before sending them to a reviewer for approval. The data can be retained in the software’s database as an audit trail once it has been approved. What are the Benefits of Bank Reconciliation Software?1. Fully Automated and EfficientA lot of financial teams spend the majority of their time entering data, trying to understand inconsistencies, and wasting time on manual and repetitive tasks. Bank reconciliation application automates the process, enabling your team to focus on higher-level duties while improving accuracy and insights, tightening controls, and reducing audit risks. 2. Improved Internal Controls and Less ErrorsBank Reconciliation Software Application increases internal controls by allowing organizations to see how the process works and feel confident that it is always running smoothly. It also prevents any activities that aren’t part of the process, and alerts may be set up for any unusual changes or activities. By reducing manual human inputs and adopting automatic mapping, you may reduce errors. Automation helps in preventing many potentially costly errors, and also alerts will be given to spot problems as they arise in real-time. 3. Higher Transparency and Audit TrailThe software saves all data history and reconciliations. This is useful for both audit trials and compliance, as well as historical data. You may utilize this record to find out how much something used to cost in the past, which might help you budget for future expenses. This helps you to better budget and manage the finances of your organization. 4. Delegated ResponsibilitiesYou may assign responsibilities and manage access controls with reconciliation software. As a consequence, everyone in your accounting team understands their responsibilities and roles. When a reconciliation requires approval, the system assigns the next step to the relevant approver automatically. Automation in bank reconciliation would help your teams stay on top of their cash balance with 100% accuracy. Click here and get a free demo of the bank reconciliation software application today!
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Winning Strategies to Manage Cash Flow in a pre-recession economyRead Now Struggling to manage variances during bank account reconciliation?Learn how 100% configurable matching rules & algorithms can help Talk to Our Experts HighRadius Electronic Invoice Presentment and Payment (EIPP) Software provides tools that automate and speed up invoice communication and facilitate a faster collection of payments, enabling a closer and more convenient relationship with customers. It automates the invoice transmission and payment collection process providing a configurable solution that supports multiple invoice formats and different modes of transmission (fax, email, portal, etc.) depending on the targeted customer, its integration with ERP systems and a rich search capability enables efficient storage and retrieval of past invoices, backup attachments to minimize disputes and short pays. Apart from that it also has some key features that you would not want to miss out: level-III interchange and surcharge; self-service customer portal; invoicing across email, customer portals, post, and fax; advanced deduction management; and lightning e-payments. The result is faster invoicing and payment collection, better customer service, and improved profitability and cash flow. Thank you for signing up! Stay tuned :) What is the difference between bank statement and bank reconciliation statement?The information on the bank statement is the bank's record of all transactions impacting the entity's bank account during the past month. A bank reconciliation should be completed at regular intervals for all bank accounts, to ensure that a company's cash records are correct.
What are the reasons for difference in bank reconciliation statement?Causes of Difference in Bank Reconciliation Statement (BRS). Errors committed by Firm. ... . Errors committed by Bank. ... . Cheques issued by the bank but not yet presented for payment. ... . Cheques paid but not collected. ... . Direct debits made by Bank. ... . Amount directly deposited in the bank. ... . Interests collected by the bank.. What are the reasons for the differences between the balance of the bank statement and the bank column of the cash book?There are several reasons for this difference, which are as follows:. Outstanding checks. The company has issued checks that have not yet been presented to the bank for payment. ... . Deposits in transit. ... . Interest on deposited cash. ... . Bank service fees. ... . Check printing charges. ... . Bank error. ... . Company error.. Why do differences occur between a company's bank statement and its company's related general ledger account?Initially, the balance on the statement is likely to be different from the balance in the ledger due to outstanding checks or deposits that are being processed by the bank. During reconciliation, accountants find any errors and note the outstanding transactions.
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