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Bank Reconciliation

What is Bank Reconciliation?

Bank reconciliation is a type of account reconciliation that matches bank statements with the cash book, or general ledger, of a company. The cash book records the debits and credits from the company’s perspective, while the bank statements record the cash receipts and withdrawals the business has made according to the bank. These two statements are often misaligned due to omissions, timing differences, and even fraud. The purpose of bank reconciliation is to identify and resolve any discrepancies between the two statements. 

There are many different types of bank reconciliation, including:

    • Credit card reconciliation. This is the process of matching credit card statements with the cash book, or general ledger, of a company. When transactions don’t align between the income received from customers and the payments made by the credit card company or payment provider, the financial controller is responsible for finding out why. 
    • Cash application. This refers to the process of matching invoices with payments, traditionally done with personnel from the A/R teams at the end of the month. 
  • Intercompany reconciliation. This process verifies the transactions of the subsidiaries, divisions or branches within a company. Transactions could include the transfer of goods and services or payments between different parts of the same company. 
  • Vendor reconciliation.  This process matches the vendor’s invoices with the company’s payments to ensure they are accurate and vendors are paid the amount due. 
  • Business-specific reconciliation. This process matches the invoices and payments of a particular business within the company’s client list. It needs to be done according to industry and internal standards.  

Why is the Bank Reconciliation Process Important?

Since the company’s cash book and the bank statement rarely align, it is difficult for companies to have an accurate picture of their cash flow at any given time. Bank reconciliation solves the challenge of cash flow management, giving your business a better understanding of its current income versus expense. 

Bank reconciliation also helps organizations: 

    • Assist in making better business decisions. With an accurate picture of your company’s cash flow, you’ll have a better understanding of your ability to move forward on an investment opportunity, or the need to wait to pay a customer until after an invoice is collected. 
  • Detect fraudulent activity. Regular monthly or even more frequent bank reconciliation can identify and deal with fraud before it gets out of hand.  
  • Discover errors and issues with A/R collections. Your A/R collections teams may be facing challenges collecting on invoices on time, especially if they are relying on manual processes. This could be improved with automated dunning workflows that clearly communicate the payment terms to customers. 
  • Prepare for tax filing. That includes identifying possible tax breaks by recording  tax-deductible expenses. 

 

What are the Three Types of Bank Reconciliation?

The different types of bank reconciliation will all have slightly different processes, so it’s important to identify if it needs a specific type or a combination of types to carry out on a regular basis. 

 

    • Internal. This is carried out between different departments of the same company. 
  • External. This type of bank reconciliation is done between two businesses or a business and the bank. 
  • Aggregate. Aggregate bank reconciliation compares multiple business accounts against the balance in the bank statement. It is particularly helpful when necessary to meet Sarbanes-Oxley compliance. 

How the Bank Reconciliation Process Works (with an example)

Bank reconciliation can be a tedious process, and many companies use an automated solution to help them with this process. Whether manual or automatic, however, the company’s controller should regularly carry out bank reconciliation using the steps below. 

 

Here’s how it works:

 

  1. View the company cash book and the bank statement side-by-side. Depending on the type of transaction, the discrepancies could be a few dollars or hundreds of thousands. 

 

    1. Examine the company bank statement carefully. Sometimes checks take a few days to clear. Or as in the case of the example below, the bank statement didn’t record the $25.00 bank fee. 
  • Examine the company’s cash book or general ledger.  Sometimes checks sit a while before they are cashed, and A/R invoice collections processes are inefficient, resulting in seemingly overdue invoices. In the example below, uncashed checks account for $19,450; and a late invoice for $10,550. 
  • Align the two accounts to account for discrepancies. The two accounts should have the same balance, which in this example is $350,975. 

 

January Bank Statement January Cash Book Statement 
Balance $350,975 $321,000
Discrepancies
  • Uncashed checks: $19,450
  • Monthly bank fees: $25.00 
  • Late A/R invoice collection: 

$10,550

After reconciliation $350,975 $350,975

 

How Gaviti’s Cash Application Process Helps

As businesses scale, bank reconciliation becomes increasingly important. Any error can mean hundreds of thousands of dollars that aren’t accounted for, giving you an inaccurate picture of your company cash flow and false confidence that leads to poor business decisions. Gaviti’s automated Cash Application Module eliminates errors and the time wasted in manual processes, improving your company’s cash flow and empowering your collections team to become more efficient. When payments are made through Gaviti’s payment gateway, they approach a matching accuracy of close to 100%. Since it seamlessly integrates with multiple banks, payments made directly to a bank account also receive accurate matching with the help of AI suggestions and other advanced algorithms.  

Want to learn more about how to make your bank reconciliation more efficient?

Speak to a Specialist today to see how it works.

 

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