They usually assume that doing some bank reconciliations sometimes will be enough to keep the books in order. In other cases, they may “reconcile-ish” the books – checking for similar numbers between the general ledger and bank account statements and only investigating instances where large discrepancies occur. However, this can be a costly mistake!
Companies that do not perform regular bank reconciliations run the risk of falling victim to fraud, unauthorized withdrawals, or bank errors. If left unchecked, these issues can lead to cash flow leaks that can hamper business operations and growth.
Furthermore, without doing periodic bank reconciliations, a business is more likely to bounce checks and get electronic payments declined. Failed payments can harm supplier and partner relationships, resulting in increased fees and stricter payment terms.
Business accounts do not include the same legal protections as consumer accounts, which means that simple mistakes like bank errors may be correctable, but fraudulent usage is typically not covered by banks. Instead, companies are responsible for identifying and stopping fraudulent use themselves. That kind of policing is not possible without routine checks on the balance of the account as well as investigation into any transactions that do not reconcile properly.
In general, all businesses should do bank reconciliations at least once a month.
It is convenient to reconcile the books immediately after the end of the month because banks send monthly statements at the conclusion of each month that can be used as a basis for the reconciliation. However, a bank reconciliation can be performed at any time using online month-to-date statements to adapt to different business needs.
Seasonal business or those with responsibilities that fall more heavily during one time of the month (for instance, service companies with time-sensitive client deliverables) may opt to shift their reconciliation process to a less busy time of the month. Gathering the information needed to prepare a bank reconciliation ahead of time or using software to automatically generate information is a shrewd way of dispersing the work to avoid tying up too much time at once.
More frequent bank reconciliations should be done for higher volume businesses and companies with greater fraud risk. In these instances, daily bank reconciliations are a more appropriate way to ensure that cash is moving in and out of the business appropriately. Conducting bank reconciliations each day allows a business to identify unauthorized ACH debits and block them before the money is transferred to mitigate fraud loss. Again, month-to-date online bank statements will assist with this non-standard approach.
While daily bank reconciliations can pose a substantial challenge due to the high volume of in-transit deposits and withdrawals in most business accounts at any given time, they are an important way to safeguard the financial health of the company.
Low Activity Accounts
If there are accounts that do not need to be reconciled at least once a month due to low activity volume, they should be closed, and any recurring deposits or debits should be transferred to more active accounts. Consolidating accounts in this manner helps to streamline the overall bank reconciliation process.
Follow our ongoing bank reconciliation series to find out other important information related to bank reconciliation requirements, common problems, and a step-by-step tutorial.
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