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Bank reconciliation is the process of verifying the completeness of a transaction through matching a company’s balance sheet to their bank statement. You may have heard it called closing the books. When businesses say they’ve “closed their books,” what they’re really saying is, “Our record of incoming and outgoing payments over a certain period of time matches our bank’s record of those same transactions over the same period of time.”
How does bank reconciliation work?
Comparing and verifying transactions on a company’s records to their bank account records is something finance teams across industries do. A common issue is that companies have to deal with delays and wait times associated with payment methods like ACH, wires, and checks. These delays make it hard for businesses to get an accurate picture of their entire cash flow.
A company could record a payment in its ledger, but the payment might not leave their bank account for several days. That delay makes it difficult to match changes in their account balance with a business’s own record of the payment and its context, such as date and purpose. This lag can cause temporary differences between a business’s reported net income and what’s actually in their bank account. This is why most companies opt to perform their bank reconciliation at the end of each month.
For example, let’s say there is an employee named Shrub who works at The Tree Company, which has one bank account. On April 5, Shrub hires a cleaner for the office. When the cleaner is finished, Shrub writes them a check for $300 and creates a record of the payment in The Tree Company ledger: the amount, its purpose (“cleaning fee”), and the date.
The cleaner deposits the check later that day. However, the check doesn’t clear until April 9, and $300 is withdrawn from The Tree Company’s bank account and deposited into the cleaner’s account. The transaction has settled.
At the end of the month, The Tree Company’s accountants download the company bank statement and go through each transaction to match with its accompanying purpose in the ledger. When they come to a $300 withdrawal on April 9, they look back at the virtual ledger and see Shrub’s record of an outgoing payment of $300 for “Cleaning fee” on April 5 and match the two records. If they have trouble matching the two due to the four-day check delay or for any other reason, the accountants go to Shrub and ask them to account for this $300.
The manual process can be time consuming and error prone. Automatic reconciliation capabilities could help businesses verify transactions as they settle in real-time, which provides an even more accurate picture of the business’ available income, and removes the need to maintain a balance “cushion” for unexpected costs.
What is the purpose of bank reconciliation?
Not only does bank reconciliation help businesses accurately report taxable income, it also boosts efficiency and productivity.
When businesses perform bank reconciliation, they take the time to ensure that every purchase charged to a company’s bank account helps move the business forward. Because the process involves tracing every transaction in their bank account to its original purpose, businesses have the opportunity to see which expenses had the greatest payoffs and which were inefficient uses of their money.
Who performs bank reconciliation?
Every business performs bank reconciliation, but the process varies based on the size of a company, number of bank accounts, and complexity of bank statements.
A large company could have ten bank accounts for categories like operating expenses and revenue. These accounts could be at ten separate banks, or even process transfers between other company accounts. If done manually, this added complexity can be time consuming and mean the bank reconciliation process takes weeks to complete.
Frequently Asked Questions:
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Understand the underpinnings of one of the most critical and time-consuming processes in finance today and explore how it’s being brought into the 21st century.
Month-end close is a critical process where the accounting team reviews and records financial transactions to close out the month.
Incoming payment details are notifications that a company is going to receive a payment it didn’t originate—meaning the receiving funds were not initially requested.
Account reconciliation is the process of reconciling an account balance against a set of financial records to ensure that the balance is complete and accurate.
Balance Reconciliation is the process of verifying and ensuring: -That the expected and actual balances in a given account are correct -That the actual balance of an account is sufficient to cover planned transactions
Balance reporting is similar to a bank statement and informs customers about their account balances in real time. Banks often perform balance reporting for businesses and larger organizations with more complex accounting needs, but it is also available to individual customers.
Bank reconciliation is the process of verifying the completeness of a transaction through matching a company’s balance sheet to their bank statement.
Batch processing is a method of processing various types of transactions. As the name suggests, transactions are processed in a group or “batch.”
Cash application is a critical process in the accounts receivable (AR) cycle that involves matching incoming payments to corresponding invoices, addressing any discrepancies, and accurately posting the payments to the appropriate accounts.
Cash reconciliation is the act of matching your company's accounting records of cash activity with the official records provided by your bank.
Continuous accounting is the ongoing process of updating a business’s general ledger with reconciled bank statement transactions as soon as they become available.
Financial reporting empowers businesses to make informed financial decisions by identifying trends and tracking performance. It also offers insights into a company's assets, liabilities, and debt management strategies.
Multi-step reconciliation is the process of dealing with three or more systems of record, that all need to be reconciled against one another.
Recoupment refers to the recovery of spent or lost funds, especially in business operations.
Transaction reconciliation is the process of matching two different data sets at the transaction level. This allows companies to verify that transactions have happened appropriately.
The 10-K is a comprehensive report mandated by the U.S. Securities and Exchange Commission (SEC) that publicly traded companies must file annually. This report provides a thorough overview of a company's financial performance over the past year.
A balance sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time, usually at the end of a reporting period, such as a quarter or a fiscal year.
A reconciliation API is an advanced software tool designed to automate the complex and often time-consuming process of reconciling financial data across multiple systems. It serves as an intermediary between different financial platforms — such as bank accounts, payment gateways, and internal accounting software — by pulling data from these systems, comparing records, and identifying discrepancies. The API is equipped to handle the vast amounts of transaction data generated by businesses, ensuring accuracy and consistency across all platforms.
The cash conversion cycle (CCC)—also sometimes called the net operating cycle or cash cycle—is a financial metric that measures the time it takes for a company to convert its investments in inventory and other resources into cash flow from sales. It represents the length of time, in days, between when a company pays for raw materials or inventory and when it receives cash from selling the final products.