Bank Reconciliation Statements and Their Importance

Last week we produced an accounting tutorial setting out how to prepare a bank reconciliation. And we touched on some of the reasons why this is an essential control for business and personal finance. However, this week, we wanted to go a little further into these reasons. In particular, if you have an assignment or test question looking at internal controls, reconciliations are a cornerstone; this article might be helpful for ideas.

Key Internal Control

A bank reconciliation plays a central part in a business’s internal control system because of the nature of cash and the bank account. As you will see, the bank account is the central record of the inflows and outflows of the business. Setting aside non-cash items, for example, depreciation, the bank account reflects most of the economic benefits that flow between the business and third parties.

For example, when a business generates sales, the bank account reflects this when the customer pays. The payment might be at the time of sale or a feature date. When the business pays for cleaning services, the bank account reflects the outflow of money.

The second reason why bank reconciliations are so critical is because of the nature of cash itself. Because money is so versatile in its use as a medium of exchange, is portable, generally holds value and is widely accepted within an economy, it can be a great temptation for people to further their economic prospects at the expense of the business. The more robust the controls around this area, the less of a temptation it can be.

Practical Book Keeping

In addition to the internal control framework, bank reconciliations provide a convenient bookkeeping function. These activities include:

  • a means to compare the business’ records with those of an independent third party, the bank. This check ensures entries made are correct and the business identifies and adjusts errors as they arise;
  • a tool for the business to ensure the bank is correctly recording the flow of transactions through its system and properly accounting for the money the business has entrusted with them;
  • ensuring the general ledger and therefore the trial balance and financial statements are disclosing the correct bank account figure. The bank account is an important asset (or liability) for any business; and
  • providing the business with a practical tool to monitor such iteams as unpresented cheques. Although of lesser importance nowadays, they are still important to monitor to ensure the timely settlement of accounts.

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