What is a Bank Reconciliation Statement?

As our team explains when discussing the importance of bank reconciliations, 

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The general ledger contains a record of a company’s cash transactions, and a bank statement tracks all money moving in and out of a company’s account. So, theoretically, these two statements should convey the same information and result in the same cash balances. However, in practice, this is rarely the case. Businesses of all sizes need to perform regular reviews, called bank reconciliations, to ensure that these two documents balance.

With that in mind, a bank reconciliation statement is exactly what it sounds like – a statement that reconciles these two financial records. Reconciliation statements account for deposits and withdrawals, bank account fees and interest, and any other cash-related activities that would affect a company's bank account balance to ensure all cash outflows have been processed and all cash inflows have been deposited. General ledger adjustments may need to be made in the form of bank reconciliation journal entries but afterwards they should equal bank account balances.

Let’s find out more about why bank reconciliations are so vital, how often they should be performed, and how to use them to mitigate ongoing business risk.

Why is a Bank Reconciliation Statement Important?
Bank reconciliation statements give businesses confidence that payments to and from the company have ended up where they should be (in other words, payments received have been deposited correctly and payments made have been processed). Where bank reconciliation discrepancies exist, further analysis should be done to determine the root cause – be it cash in transit, outstanding checks, simple error, or something more serious.
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Regular reconciliations ensure that a company is accurately presenting its financial position to owners, investors, and partners, the importance of which cannot be understated. To perform a bank reconciliation an accountant needs the previous period’s statements as well as the current period’s statements, which means they need to be done on an ongoing basis to ensure their accuracy. Sporadic reconciliations do little to catch discrepancies and provide the ongoing benefits that reconciliation statements aim to provide.

How Often Should You Reconcile Bank Accounts?
As a best practice, bank reconciliation accounting should be done at least once a month. However, this is not the only frequency accountants can encounter. The volume of a company’s cash transactions will be the primary factor to determine how often a bank reconciliation should be done, although staffing levels may also play a role as well. For instance, companies with extremely high transaction volumes may do bank reconciliations on a daily or weekly basis, while micro businesses and small companies may only do them quarterly.

The important part is that bank reconciliations be done in regular intervals, whatever that interval may be. Because bank reconciliations are likely not on the top of anyone’s list of favorite activities, they can get deprioritized when staff is stretched thin due to turnover or increased business demands. However, not making the time to do timely bank reconciliations leaves the company vulnerable to cash flow shortages, fraud, and funding rejection.

Using Bank Reconciliations to Mitigate Risk
When it comes to using bank reconciliations as a risk management strategy our team explains,

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.

Bank reconciliations are a company’s primary tool for combatting fraud because they can uncover billing fraud in all of its many forms, which accounts for more than a quarter of all small business fraud.

Even at organizations where no fraud is occurring, there is always the potential for error and simple errors can have serious cash flow implications, especially if they are carried over unchecked from one reporting period to another. Since cash flow is the lifeblood of any business, cash shortages can have serious production, promotion, staffing, and funding implications. Therefore, it is extremely dangerous to the health of a business to not perform formal bank reconciliations periodically because they are so vital to effective cash flow management. Simply put, running a business without reconciling your bank accounts is like driving in zero-visibility weather – you cannot see where you are going, must slow down, and are at an increased risk of a catastrophic event.

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