Denver small to mid-sized businesses that are looking to improve financial processes should regularly perform bank reconciliations. Not only is this an essential component of maintaining accurate financial records, but it helps to drive cash flow management, financial reporting, improved decision making, and prevents financial statement errors. In addition, regularly reconciling accounts helps to minimize the potential for fraud and keep management alert for unusual behavior. Establishing a consistent program will make it easy to stay on top of this important function. To help clients, prospects, and others, WhippleWood CPAs has provided a summary of the best practices below.
Benefits to Bank Reconciliation
Organizations that routinely reconcile books can ensure accounting data is more accurate. They can also identify fraudulent transactions in a timely manner, reducing external risks and decreasing the likelihood of internal bad actors. Bank reconciliation may also change the approach businesses have with different vendors. For example, if the reconciliation process reveals that a vendor or client is not paying in time or has sent bounced checks in the past, businesses can choose to change the relationship or the terms of the billing agreement.
Best Practices for Reconciliation
From start to finish, here are 8 essential steps all businesses should take when reconciling to abide by accounting best practices.
- Perform Reconciliations Regularly After Acquiring Bank Statements – Reconciling accounts on a regular basis, preferably monthly, can ensure that errors are caught and resolved quickly. Accounts should be reconciled shortly after bank statements are received to reduce the risk of errors between accounts. Businesses that have high volumes of transactions may even consider making weekly reconciliations.
- Gather Other Necessary Documents – In addition to the bank statement, businesses should retrieve the cash account ledger from their accounting tool, as well as any other supporting documentation that can help in the reconciliation process. This can include electronic transaction records, canceled checks, and deposit slips.
- Prepare Business Records – With the bank statement as a reference, check the ending balance of the statement with the ending balance of the accounting records.
- Find and Address Discrepancies – If there are any discrepancies between these numbers, it’s time to investigate where items may be mismatched. There may be outstanding checks that have not cleared the bank but have been issued. These should be added to the bank statement balance if they are found. There may also be deposits that are in transit but have yet to be recorded. These can also be added to the balance on the bank statement. Businesses may also see discrepancies if there are any service charges, interest, or bank fees that may not have been registered in the accounting software. These can be subtracted from the bank statement balance to match the accounting balance.
- Adjust Balances – Apply adjustments that need to be made to ensure both balances are equal. This includes journal entries added to the accounting software so the books can be closed.
- Verify and Finalize – The more carefully organizations review their reconciliation process, the more certain they can be that the adjustments made in the finalized balances are accurate. Finish by producing a bank statement that details any changes that were made with ending reconciled balances documented. In addition it is important to print PDF versions of the reconciliation. This will make it easy to review past activities to identify issues or discrepancies in the future.
- Implement Strong Internal Controls – To prevent fraud and errors in the reconciliation process, implement strong internal controls, including segregation of duties. Divide critical tasks among team members to ensure no single person is in charge of the entire process. For example, have one person receive payments and have another record them in the system. Separate duties can include authorization of transactions, recording of transactions, and safeguarding of assets. Even though it may seem that adding more people to the process could slow things down, segregation of duties can lead to more streamlined processes from well-defined roles. Increasing focus on one side of the cycle for each person can reduce bottlenecks and improve operational efficiency.
- Automate Where Possible – Manual entry is prone to errors. Accounting software often comes with built-in features that can make processes more efficient and accurate and ensure for an easier monthly reconciliation process.
Contact Us
Consistent reconciliation of all business accounts is an essential step in the accounting process. Ensuring your organization regularly engages in this process will provide confidence financial records are accurate and reduce the potential for unwanted activities. If you have questions about the information outlined above, or need assistance with another tax or accounting issue, WhippleWood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.