At its simplest level, bank reconciliation is the process of matching transactions recorded in the company’s general ledger to transaction son the bank statements. It treats the bank statement as the ultimate source of truth so transactions in the general ledger should ultimately result in a corresponding cash event.
Bank reconciliation is a key internal control tool that canhelp prevent and identify fraud, errors and missing items before financialstatements are reported. It is a core part of the close process that givescomfort to key accounts on the financial statement.
In the past, bank reconciliation would take place after the close of the period and after the bank statements had been received. However, with the availability of bank data into an accounting system on a daily and sometimes hourly basis, companies are no longer limited to waiting until the end of the period to reconcile their bank accounts.
A more frequent reconciliation cadence can help identify issues sooner rather than later and allow the team to be more proactive in addressing issues as they arise. Blue Onion supports clients that reconcile their bank accounts on a daily or weekly cadence and who then typically do a full review at the end of the month.
Because bank reconciliation is a core part of the close process, being current can make for a significantly faster time to produce financial statements — with teams doing more of a review of all the data than a manual and time- consuming exercise at the end of the period.
Depending on the company’s size and resources, teams may want the individual performing the bank reconciliation to be different than theine who records the transactions in the general ledger or processes cash receipts and disbursements as an extra level of internal controls and checks.
We just passed an audit. Even if the bank rec numberisn’t matching, what risks can the company be exposed to?
Companies can pass audits with an out-of-balanced bank reconciliation as long as the out-of-balance amount is not material. If the unreconciled balance were material, auditors would test that balance to ensure that the values can be validated.
By leaving unbalanced values in a bank reconciliation, the company has only prepared a temporary solution and might be exposed to more risk than expected for two reasons:
Companies that accept credit cards as a form of payment tend to have additional complexity when it comes to bank reconciliation.
Bank reconciliation issues tend to manifest themselves as unknown growing balance sheet accounts, specifically clearing accounts or accounts receivable in relation to reconciling orders to cash settlements. Because reconciling each individual order to a payout in the bank account can be extremely difficult to nearly impossible manually, it can be challenging to investigate the root cause of the issue.
The root cause can vary but we tend to see discrepancies between data in the order system and the general ledger. These differences can be a result of several issues such as unreliable data connectors between systems, incorrect order mapping or manual processes that occur in one system but not the other.
Blue Onion helps accounting teams reconcile orders to their cash conclusion in the bank account. With our sophisticated data engine and powerful algorithms each order is automatically matched to a payment in the corresponding payment processor, which is then matched to a payout in the bank account.
We take one of the most painful parts of bank reconciliation and automate it so companies know exactly what orders have been settled into the bank account, including any fees and chargebacks that need to be captured in the general ledger. This eliminates the need for complex and error-prone Excel workbooks and allows teams to close the books faster and accurately. An accurate and timely reconciliation process also provides visibility into cash that is still in transit, which can be crucial for managing cash balances and predicting cash flow.
Disclaimer: The information provided in this article is intended as general guidance only and is not intended to be nor should it be considered legal or financial advice. You should consult with your CPA to review your business’ specific accounting issues and challenges.