The primary purpose of a bank reconciliation statement is to provide a clear indication of the financial performance of a business and it is also a useful tool to help identify and thwart fraudulent activity.
Using this summary of the company’s banking and business activities will allow the opportunity to scrutinize the deposits and withdrawals in order to confirm the financial health of the business as well as providing an early warning of fraud.
Here are the key takeaways relating to bank reconciliation and what is needed in order to interpret the information accurately.
Making sure the information aligns
The first step in the reconciliation process is to gather the required information that will enable you to create a reliable bank reconciliation statement.
You will need to have both the current and previous month’s statements as well as the closing balance of the account. It is absolutely vital that every single deposit and withdrawal is used when preparing the reconciliation statement.
It should be remembered that the fundamental purpose of creating a bank reconciliation statement is to identify any differences between the bank balance and the book balance.
Understanding book balance
You may not be familiar with the term book balance, and the basic explanation of this accounting term is that it describes the specific sum of money a company has available to pay vendors and make purchases once adjustments have been made for checks that are yet to clear and deposits still in transit.
In simple terms, a book balance is a representation of the tangible amount of money available to the business at a specific point in time.
Adjustments have to be made for certain transactions that are yet to be finalized.
For example, if a payment is anticipated to arrive in the bank account but the cash has not actually arrived at the time of reconciliation the balance of the cash account might need to be adjusted to reflect that scenario.
If a check has been mailed to a supplier but not yet been cashed, it can be accounted for as an adjusting balance. Another example would be interest payments which are anticipated into the account but have not yet arrived at the time of the bank reconciliation.
Using data to spot potential fraud
The reason why an accountant would usually be used to create a bank reconciliation statement is down to the fact that it makes sense to use a trustworthy third party who can verify the financial transactions independently.
As long as they have all the relevant information to create an accurate statement they can then look to perform a series of verification checks.
They will usually verify if the vendor listed is the same as the person who has cleared the check. Another fraud check would involve checking to see if all of the vendors listed can be identified through supporting invoices or other relevant documentation.
Even if a bank reconciliation statement doesn’t identify a potentially fraudulent transaction it is good to have these monthly checks as it may help to dissuade someone from attempting fraud.