Importance of Bank Reconciliation in Internal Control

Companies usually maintain several bank accounts through which they conduct business. These bank accounts may exist in different banks or at the same one. Regardless of that, these accounts enable the receipt and payment of transactions. In some cases, the jurisdiction in which a company operates also requires it to conduct transactions through banks.

In most cases, companies know the transactions that occur within a bank account in advance. Usually, these include payments to suppliers, which a company initiates. Similarly, it may involve receipts from customers, which companies link to invoices. However, some financial transactions may occur in the bank account without the company’s knowledge.

Companies maintain a bank account in the general ledger. This account includes details of all payments and receipts into the bank account. As mentioned, however, companies may miss some transactions recorded by banks. Therefore, companies must reconcile this account with the bank statements received from the bank.

What is a Bank Reconciliation?

Bank reconciliation enables companies to reconcile their bank ledger account to the bank balance. Usually, this process involves tracking transactions from both records. Through this process, they can track any transactions occurring on one or the other account. Once companies identify those transactions, they will update their general ledger to reflect the correct amount.

A bank reconciliation process comprises several steps. The first step involves obtaining the bank statement and comparing it to the general ledger balance. If any differences exist between both, companies must reconcile those differences. In most cases, these transactions may fall under two categories. These include timing and unrecorded differences. However, companies mostly make reconciliations in their own accounts.

A bank reconciliation statement starts from a balance from one of the records. Companies may choose to take the general ledger account balance or bank balance. Once they do so, they will adjust for any missed items to ensure both amounts match. Consequently, they may also identify transactions that they must record in the general ledger account. Sometimes, they may also come across errors in one of the statements.

See also  How to Record Interest Receivable Journal Entry? (Example, Definition and More)

Bank reconciliations occur at regular intervals, usually monthly. Companies perform this process to ensure that bank records reflect an accurate amount. Similarly, they can be crucial in detecting any fraud or errors in the records. Therefore, bank reconciliations are a vital part of a company’s internal control systems. This process also plays a significant role in the accounting process.

Overall, bank reconciliation allows companies to reconcile their bank and general ledger balances. It is a part of the internal control process, which is crucial for companies. Through this process, companies can identify and record transactions from bank statements. Similarly, it can also help identify any fraud or error in these records.

What is Internal Control?

Internal controls are the rules, procedures and process that companies employ internally. These rules allow companies to ensure the integrity of financial and accounting information. Similarly, they can prevent any fraud or error from occurring within those systems. Furthermore, internal controls can promote accountability by assigning roles and evaluating them.

In most cases, employing internal control systems is mandatory for companies under some jurisdictions. Similarly, internal controls are a crucial part of the corporate governance process. For companies, internal controls ensure efficient and effective operations. Through this process, companies can respond to significant risks that they face appropriately.

In essence, internal controls are a process for assuring a company’s objectives in various areas. Usually, this process involves all procedures that control risks that companies face. It also primarily focuses on the reliability of the financial reporting process within companies. Within this process, companies may face several challenges. However, it can lead to significant beneficial outcomes.

Internal controls are a crucial part of any organization. Several elements are critical within this process, defined by the COSO frameworks. Similarly, it allows companies to streamline their operations to fit their objectives better. This way, they can align their activities and goals to achieve a better result. Through this process, internal controls provide significant benefits to the underlying company.

See also  What is the Abbreviation for Debit? (Explained)

Overall, internal controls are the processes that allow companies to manage risks. They include several rules and mechanisms to ensure the integrity of financial and accounting information. For most companies, internal controls are mandatory, while others may implement them optionally. Either way, these controls can provide significant benefits for the company.

What is the importance of Bank Reconciliation in Internal Control?

Internal controls have several procedures, rules and mechanisms. One of these includes bank reconciliation, which is crucial in accounting. In the internal control of banks and cash, bank reconciliation plays a vital role. Therefore, it is an essential part of any company’s internal systems. The importance of bank reconciliation in internal controls includes the following.

Detect fraud

The crucial importance of the bank reconciliation statement in internal control is that it detects fraud. For companies, banks hold cash balances, which are critical in transacting with other parties. However, it also includes significant risks, making bank accounts susceptible to fraud. The bank reconciliation process plays a crucial role in detecting and preventing that fraud.

Bank reconciliations allow companies to compare their bank ledger accounts and bank statements. In most cases, they will include differences. However, most of those differences are justifiable or expected. Any unknown or unexplained amounts in these accounts can signal fraud. Companies must investigate those amounts to ensure they come from valid transactions.

Prevent errors

In some cases, companies may also experience errors in their processes. While these errors may look similar to fraud, they exist due to mistakes. The bank reconciliation process can allow companies to identify and prevent those errors from occurring. Like fraud, companies can detect these errors on a timely basis. Once they do so, they can prevent them from impacting the integrity of financial systems.

See also  How Do You Account for Advance to Employees? (Definition, Example, Journal Entries)

In modern accounting systems, errors may not exist due to the outstanding data validation process. However, these errors can still find their way to the financial systems. In some cases, the bank may also commit errors through unwanted debits or credits. With bank reconciliation, companies can detect those instances and rectify them.

Update records

As mentioned, internal controls focus on the integrity of financial and accounting systems. However, these systems must be up-to-date. With this process, companies can identify anomalies in the bank general ledger. This way, they can update their internal records to reflect the most recent and accurate figures.

As mentioned, the bank reconciliation process identifies two types of differences. These include timing and unrecorded differences. The former usually requires adjustments in the bank reconciliation statement only. However, the latter also enter the accounting systems and general ledgers. Therefore, the bank reconciliation process can help update a company’s records.

Provides verification

When companies perform bank reconciliation, they go through all items within the bank statement. Similarly, they also check transactions from the general ledger accounts. If the balances reconcile in the bank reconciliation, the process gets completed. However, if there are any remaining differences, some issues may exist.

By comparing transactions from both statements, companies can ensure their verification. If an amount appears on both records, it implies the transactions are of verified nature. However, if there are any unexplained or unexpected amounts, the verification is questionable. In internal controls, verifying transactions is highly crucial.

Conclusion

Bank reconciliation helps companies reconcile their general ledger and bank statement. This process is crucial in the internal control systems that companies employ. Overall, the importance of bank reconciliation in internal controls is significant. Therefore, it is critical in accounting systems that companies use.