Before we look into the advantages and disadvantages of bank reconciliation, let’s quickly go through what the term stands for. So, bank reconciliation is a process wherein the bank balance as per the organization’s own records is matched with the balance as per the bank statement. The purpose is to ensure that figures in both the records (records of the bank and the organization) are correct and are in agreement. It confirms whether money leaving the organization is the same as the actual money which is spent. It provides consistency and accuracy in financial accounts. Also, Reconciliation is useful in explaining the differences between the two sets of records or finding out the errors. Unexplained differences are signs of theft.
Advantages of Bank Reconciliation
No matter how reliable the systems are, human errors in the system are always possible. Your bank might have made an entry error that shows a larger balance in your bank account than it actually is. However, you can rectify the mistakes with reconciliation by pointing them out after your reconciliation.
Bank reconciliation helps you identify fraudulent transactions in your account. When your records don’t match the bank’s records, you will question this mismatch and its reason. On the other hand, if you do not monitor your bank account by reconciling it, the fraudulent transactions may not get your notice. Hence, early identification of fraudulent transactions may help you recover your money back. And it also prevents any such transaction from happening again.
Tracking Account Fees
Records from the bank will show you all the fees charged to your account. These fee payments are typically not present in the records of the bank’s customers. Also, you are often not aware of different kinds of bank charges or taxes present in your account. Reconciliation helps you verify that all the fees charged by your bank are valid and as per your account terms. Also, if you keep reconciling your bank accounts regularly, you are more likely to notice when your bank starts charging you a new fee.
Keeps the Account in Good Standing
Bank reconciliation helps keep your bank accounts in good standing. When you accurately know what you have in your account, you are less likely to overdraw money from that account. Being busy with their hectic schedules, businessmen usually forget to pay their bills in due time. So, to get rid of this, businesses usually opt for automatic deduction of monthly bills from their bank account. Often these bill payments do not appear in the records of businessmen. Hence, the chances are that the account either gets in an overdraft or misses a payment. To avoid such situations, bank account reconciliation is a good option.
Many customers prefer to pay their dues by cheque. Since the accounting department of your business receives a number of cheques every month, they may forget or misplace some cheques, leaving them uncashed. So, if you don’t reconcile your bank account regularly, you may not get that amount of money in your bank account. On the other hand, if you sit to reconcile your bank account, you will notice the difference between your records and your bank’s record. Matching the transactions will reveal that your records show payments from your customers, but your bank’s records do not show any such payment. Hence, bank account reconciliations confirm all your receipts, helping you to identify the entries for a receipt that you didn’t deposit.
Disadvantages of Bank Reconciliation
Uncleared Cheques Can Create a Mis-match
In your course of business, it can happen that your creditors do not clear a cheque given to them. Not clearing a cheque means that the creditors do not present it before the bank for the payment. Now, when you wrote that cheque in favor of the creditor, you would have reduced your bank balance with the amount of the cheque. However, the creditor does not present the cheque to the bank, so your actual bank balance remains higher than what you have in your records. So, when you will sit for the bank reconciliation process next, you will notice a difference between the two records. Multiple such instances in a single period can make it very difficult to reconcile the records as there is not a single figure to look out for in the records.
Changes in Dates Recorded by Banks
It may happen that the dates of transactions recorded by your bank are different than your dates. E.g., when you write a cheque in favor of a creditor, you will record in it your books on the date you issued the cheque. However, the creditor may clear that cheque after, say, a month of you writing that cheque. Also, cheques given to you from your accounts receivable will be recorded by you on the date you receive the cheque, but the bank may process the payment after 3 days. Multiple such events can confuse you in reconciling your bank accounts. Not only this, it opens up the possibility of an unlawful transaction from your account not getting noticed.
Too Many Transactions
A bank reconciliation statement can become a headache if you run a big and booming business with too many transactions from a single bank account. The reasons are quite clear; first, too many transactions will create a big list of transactions to be checked. Second, the more the number of transactions, the greater will be the confusion in matching them. Top it with the difference in dates of various transactions between you and your bank- the bank reconciliation process will become a challenge.