NigCareers

Why must you perform bank reconciliation?

If you have bank account(s), it is very important that you perform bank reconciliation at least once every month. Preparation of bank reconciliation statement is not optional; it is a must for every business owner.

When I decided to write about this topic, my mind just flashed back to my secondary and tertiary schools days. That was about twenty years ago. I remember vividly that preparation of bank reconciliation statement was one of the topics that our teacher/lecturer focused attention on. They kept reinforcing the need for us to fully understand the topic. To us that time, as students, we were just asking ourselves; “what is so special about bank reconciliation?” But the two teachers that taught me the topic kept saying that we should not just study the topic for the purpose of passing the exams. They stressed further that the topic is very practical and that as an accountant to be, we just had to fully grasp what bank reconciliation statement is all about. They encouraged us that we should know how to prepare a bank reconciliation statement. In  many occasions, they would give us questions that we should reconcile our cash book balance back to the bank balance. In another time, they would twist the question. They would ask us to reconcile bank balance to our cash book balance. They did all these to ensure that we understood what bank reconciliation is all about. Still I never appreciated their efforts until I started my career as an auditor.

Possibly you are reading this topic and you are asking within yourself; ‘do I actually need to perform bank reconciliation for my account?’ If you are in this category, I would say that you are like me when I was still a student. But today, I will play the role of a teacher. The same way my teachers enlightened me on the importance of bank reconciliation, I feel I need to do the same thing today. When I started working as an auditor, I could see the reality and practicability of what they were teaching me. Without wasting much of your time, let’s go straight to the topic.

Read Also: Importance of Book Keeping to Small Businesses

What is bank reconciliation?

Bank reconciliation involves bringing your cash book balance into agreement with your bank account balance by identifying and resolving the differences between the two accounts. If you maintain a bank account, the balance of the account is supposed to agree with your cash book balance, all things being equal. But in reality, you discover that there may be a discrepancy between the two accounts. The discrepancy can be caused by many factors such as unpresented cheques, uncredited cheques, direct credits, direct debits and bank charges etc. Before I continue on why you need to carry out bank reconciliation, let me try to shed more lights on the terms I just mentioned.

Unpresented cheques: These are the cheques you issued to someone, possibly your suppliers, and they are yet to present the cheques for drawing. If they are crossed cheques, it is possible that they lodged the cheques into their bank accounts towards the end of the day and at the close of the month. If this is the case, the cheques will not clear at the month end. Meanwhile you must have posted the cheques into your cash book. This scenario usually causes discrepancy between bank and cash accounts.

Uncredited cheques: These are the cheques you received from your customers and you are yet to deposit them into the bank. On the other hand, you might have deposited the cheque at the month end and they are yet to clear in the accounts. When you received the cheques, you must have entered it into your cash book but your bank will not credit your account until the cheques clear.

Direct Credits: Direct credits occur when somebody pays directly into your bank account without your knowledge. This usually occurs when your customers have your bank accounts details thereby giving them privilege to pay into your bank account on their own. Another example of direct credits is payment of dividends from companies where you have interest.

Direct Debits: Direct debits can be standing orders which you have given your bank to make certain payments on your behalf on a regular basis. It could be payments of subscriptions or investments in mutual funds. Until you carry out bank reconciliation, you may not remember that such standing order exists.

Bank Charges: Banks normally charge fee against your bank account without any recourse to you. This must have been part of the agreements you signed with them when you opened the account. Charges like commission on turnover, interest on overdraft and VAT are the popular charges.

Read Also:Funding Options for Small Businesses

Why Bank Reconciliation?

You carry out bank reconciliation for these reasons:

Correction of Errors and Mistakes

Human beings are prone to making mistakes. Your accountant, bookkeeper or even your banker can mistakenly enter a wrong figure into your account. If the workload is too much or the person making the posting is distracted, there is tendency for him to make a mistake of entering a wrong figure. Such error can be error of transposition. Instead of entering $10,549, he may mistakenly enter $10,459. This type of error is common. Mere looking at the two figures, you may not even notice the difference until you carry out bank reconciliation. Another type of error is the omission of a digit in a number. It is possible to enter five digits instead of six digits number especially when the figures that make the digits are the same. Errors can also occur through posting into a wrong account. Some accounting or banking software usually suggest accounts that are similar to you while posting by way of ‘drop down’. One can mistakenly select the wrong account in the process. Having posted the transaction, the person will believe that the transaction is concluded. You will only discover such error if you carry out your bank reconciliation.

Detection and Prevention of Frauds

Bank reconciliation will not only help you uncover frauds, it can help you prevent frauds too. I remember an incident that happened in one of our client’s office years back. This client was a Secondary School. As part of our yearly audit exercises, we carried out the full reconciliation of a particular bank account when we discovered a huge difference between the cash book balance and the bank account balance. Surprisingly, there were tellers (tickets) showing that all receipts were duly lodged into the bank. But when we tried to trace the tellers into the bank account, we discovered that many tellers were not posted into the bank account. Our further investigations revealed that those tellers that we could not trace into the bank accounts were essentially cash transactions. Don’t let me go to the details of the story. But it was a case of fraud in highest order. So, you may not know what you are losing if you don’t perform bank reconciliation for your bank account. If you want your bank reconciliation to be effective, it is advisable to allow somebody that is independent of your accountant or bookkeeper to do it. If you cannot hire a CPA, you can hire someone who is experienced enough to carry out bank reconciliation. The value you will get for this service is worth the token you will pay the person. Also, when a person is aware that somebody is coming to check his records, this can prevent fraud. Fraud thrives where there is route for escape. If somebody knows that he will not be discovered if he commits fraud, you have created an avenue for him to do it. There should be checks and balances.

Updating of Accounts

One of the essence of bank reconciliation is for you to be able to identify the discrepancies between the bank account and your cash book. After you must have conducted the bank reconciliation, you need to update your cash book to reflect the true position. You will post all direct credits, direct debits and bank charges into your cash book.

Prevention of Overdrawing of Account

Some people rely on the bank account balance as a basis for issuing cheques to suppliers. The truth is that, your bank balance may not show the true position of your bank account balance. I mentioned unpresented cheques as one of the reasons why there may be discrepancy between your cash book and your bank balance. If you have issued out cheques that are not yet presented for payment, then the balance your banker may be giving you will be incorrect. If you don’t carry out bank reconciliation, you may be tempted to issue another cheques believing that you still have money in the account. This may lead to the over-drawing of the account. Bank will charge you interest for any overdrawn amount. In a situation where you don’t have any line of credit with your bank which will allow you to overdraw the account, the cheque will bounce.  Bank will charge you for this and it can also dent your image in the sight of the payee. Besides, issuance of dud cheques is considered a criminal offence.

Read Also: Benefits of Outsourcing Bookkeeping and Accounting Functions

Therefore, as a business person, you should not see bank reconciliation as a burden. It is an exercise you should see as part of your routine programme. How often you reconcile your accounts will be determined by the volume of your transactions. At least, once in a month is a benchmark. To make the task easy, it is better to have a bank reconciliation template. This will make the account reconciliation to be easy and fast. You don’t need to do this by yourself. If you don’t have the time or expertise to carry out bank reconciliation by yourself, you can hire someone to do it for you.

Growing Your Business