In Pursuit of Profit
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The most common bank reconciliation issues include simple problems arising from money movement delays to more sophisticated complications like fraudulent activity.
In-transit checks and deposits can throw off a bank reconciliation because the movement of cash is not immediate. When a check, electronic payment, wire transfer, ACH transfer, or cash deposit is received, a business has recorded this movement of money, but the bank may not have received the funds yet. This is especially problematic in higher-volume accounts where a steady stream of cash is flowing into and out of an account simultaneously.
When the gap for funds to clear a bank spans a recording period (like a daily close or after a month-end reporting), a business’s financial statement will not match its bank statement record. This time-lapse can be especially evident when the reporting period covers a major holiday when banks are closed. In these cases, entries need to be booked to reconcile these accounts for the specified period.
When checks are issued, but there is a delay in them being cashed or deposited, bank reconciliation issues can arise as well. Booking an entry to carry this check balance to the following month will reconcile accounts during the current reporting period while also allowing the business to keep track of obligations to pay in the form of checks.
Uncleared checks that are never presented for payment will also pose a reconciliation problem. Once a reasonable timeframe has passed in which the check should have been deposited (typically 90 days), additional steps should be taken to resolve the matter. Reaching out to the payee to remind him/her to present the check for payment is an easy first step that can often remedy the issue. For a check that never reached the payee or a payee that cannot be contacted, the original check should be voided and a new check issued upon request.
Recording errors can result in check or deposit values being entered incorrectly, which will unexpectedly thwart a reconciliation attempt. While these are far more common on the business side than the bank side, either entity can be culpable in this type of mistake. Ensuring that correct values are listed for each transaction upfront ensures a smoother bank reconciliation and minimizes the need for subsequent adjustments.
An error can also result when a check or deposit is missing. Again, this is more common on the business side. With the prevalence of automated bank reconciliation features from accounting system apps, sometimes all it takes is an errant click of a button to misplace a transaction.
After the movement of cash is accounted for, bank fees must be accounted for as well. Things like overdraft fees and NSF (non-sufficient funds) check fees will throw off a bank reconciliation if they are not included. Ideally, with regular bank reconciliation procedures in place, these fees should be minimized naturally due to smarter cash flow management.
For businesses accruing substantial bank penalties, more consideration should be given to selecting a bank with a more lenient fee schedule or better overdraft protection.
Fraud is a serious topic that many businesses would prefer to avoid. Whether unauthorized withdrawals are occurring internally by an employee or partner that should not have access to the account or by a third-party that has maliciously breached the account, fraud can sink a business.
A division of duties can help prevent against fraud internally. The employee responsible for reconciling accounts should not also be the one recording transactions or disbursing cash. Otherwise, embezzlement can occur, and the evidence of such actions can easily be hidden. It is for this reason that many business owners choose to hire a third-party finance professional to conduct impartial bank reconciliations.
Externally, supplemental bank protections can automatically freeze payments that have not been pre-approved to bolster account security. While these measures are not standard on most business banking accounts, some institutions offer them for preferred customers or as a premium option.
In our ongoing series, we have already covered why a bank reconciliation is important, how often bank reconciliations should be done, and what is needed to perform a bank reconciliation. With these fundamentals in place, we will wrap up the series and walk through the steps required to conduct an accurate bank reconciliation.
Do you have a unique bank reconciliation problem that cannot be resolved?
Our team of finance experts can investigate and resolve errors between bank records and financial statements. Let us manage your regular bank reconciliations or better equip your team to handle them in-house. Contact us here.