7 Functions of Bank Reconciliation Statement


Today, you’ll learn the functions of a Bank Reconciliation Statement.

These bank reconciliation functions increase the reliability of the reported cash balance of an entity. For instance, one of its functions enhances the strength of an entity’s internal control. When validating the cash balance, the accuracy of the cash amount available for the business operation has been actually verified. In an organization, the cash balance must be true to be relied upon. Hence, the functions of bank reconciliation strengthen the trustworthiness of the disclosed cash balance of a business.

Most startups do not prepare bank reconciliation statements. Notably, they focus more on generating capital resources in meetings rather than attending financial records. They forgot to validate the amount of cash available, which is the lifeblood of a business. Hence, they have not made a bank reconciliation report.

Equipment acquisitions should also be affected by the remaining cash of an entity. To explain, a decision to purchase a piece of equipment should be influenced by how much money is available. What if the reported cash amount is incorrect? Since buying decisions are also guided by the amount of cash for operations, it is important to verify the fund balance reported.

What is a bank reconciliation statement?

According to Investopedia, a bank reconciliation summarizes banking and business activities. It also reconciles the entity’s records to its corresponding bank accounts.

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It reveals the reconciling items to be adjusted in the depositor’s records.

Note: The functions below are not listed in a particular order of significance.

1. Functions as an internal control tool

In a Blackline.com post, a bank reconciliation functions as an internal control tool. Since it prevents the occurrence of fraud and errors month after month. (source)

For example, it also detects NSF checks already recorded as revenue. Which overstates income or understates receivables.

This example shows the expectation that clients have already paid. It is common among businesses without strong internal control.

When the internal control is weak, an entity usually reports excellent inflated revenue. But there is no actual cash backup.

Hence, auditors often need the preparation of bank reconciliation statements. They need to confirm financial transactions before the issuance of an audit report.

2. Helps find recording errors

Errors in accounting usually occur because of the number of transactions processed daily. Even with fewer transactions, mistakes are also made because we are only human.

Hence, the review is necessary to correct the accounting mistakes.

Bank reconciliation assists the accountants in verifying the amounts recorded in the book. First, all cash collections are matched with the bank statement. Next, all cash disbursements are also compared to reveal unrecorded transactions and unauthorized transactions. Finally, it shows the reconciling items, which may comprise recording errors.

3. Catches fraud and unrecorded transactions

The number of losses arising from fraud and unrecorded transactions can accumulate. If it remains undetected and the amount becomes significant, which cannot be recovered.

Hence, it is necessary to prevent the occurrence of fraud, while it is small to reduce the losses. A bank reconciliation statement catches fraud and unrecorded transactions by customers and employees.

Unauthorized transactions can be hidden by an incomplete recording of collections from customers. For example, unrecorded deposits can offset unrecorded disbursements and withdrawals.

4. Confirms the cash balance in the balance sheet

The cash balance in the balance sheet affects the decisions of the management every day. If the figure is incorrect, the management will also make poor decisions.

What if a company issues an NSF check because there is still cash on the balance sheet?

Its effect can be a hefty bank charge.

Hence, a bank reconciliation statement confirms the cash balance on the balance sheet. Because it reveals the reconciling items of financial transactions.

5. Addresses problems as they arise and before it becomes significant

One of the functions of bank reconciliation is it addresses arising problems immediately. The report shows the reconciling items, for example, the book reconciling items.

Book reconciling items are usually recorded in the books to correct the cash balance.

6. Keeps track of accounts receivables and accounts payables

When check deposits did not clear in the bank, the receivables had been understated because of the customer’s insufficient funds. Overstatement occurred since the balance was deducted by collections.

Conversely, accounts payable are also understated if check payments have not cleared because the balance was reduced.

7. Discloses the true cash balance

Finally, a bank reconciliation calculates the entity’s final cash balance since it takes reconciling items into consideration.

Reconciling items affects the cash final balance because it is the amount used for management financial planning. They are the reasons a bank reconciliation report should be prepared.

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