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Balance Sheet Reconciliation is Crucial to Business. Learn Why!
The Balance Sheet in any organization is a reflection of the efficiency (or inefficiency) of its performance. Hence it is necessary that it be precise and accurate in every respect. A balance sheet also gives the position of the business at any point in time – monthly, half-yearly or annually. All heads must balance against fixed parameters if an exact picture has to be projected for that period.
While efforts are made in this direction it is not always feasible to do so and is why a certain degree of balancing has to be set off between specific heads of accounts. This is known as balance sheet reconciliation and is extremely crucial for your business.
There are many different aspects of balance sheet reconciliation but the most important one for a number of reasons is bank sheet reconciliation. What does this process mean for any business?
Consider this scenario. You have issued a check by debiting your cash account. However, the instrument is presented to your bank after a month. For this period your cash in the bank will show inflated amount than what should actually be. Consider the opposite now. You have received a check entered it in your cash account but have not deposited it in your account.
Hence your bank account will be less than what you think it is. You’ll be having hundreds of transactions like this and if the accounts are not reconciled every month, your cash estimates can go awfully wrong.
It is, therefore, no surprise that un-reconciled bank accounts can be disastrous for you and is generally linked to two factors. The first is that you will be facing cash discrepancies that will have a direct impact on your cash flow requirements since you’ll not have a clue about your actual financial status.
Second, you will be keeping your doors open to scams and frauds. Studies in different countries have proved that bank reconciliation kept pending for years have resulted in huge losses for businesses, something that you should do well to avoid at all costs.
Now, why is bank sheet reconciliation and balance sheet reconciliation crucial to your business?
1. Ensuring accuracy of cash position –
Once the debits and credits that are reflected in the bank statement are reconciled with the debits and credits existing in the general ledger Cash account the process is said to be complete.
However, as explained before there will be outstanding items that have not been actually entered in the bank account and these have to be subtracted or added as the case may be to the cash book figure.
This amount has to tally with the closing cash balance in the bank. Now any discrepancy here means that the actual cash position in the bank is not a true image of the health of your company and its cash reserves.
2. Ensuring accuracy of all heads in Balance Sheet –
The most common form of bookkeeping is the double entry system where a particular debit or credit is set off by a corresponding credit or debit in another account.
For example, if you have not credited a check to your cash account for cleaning services, you have also surely omitted to debit profit and loss account for expenses towards cleaning.
Hence, not only is your cash book being affected, your profit and loss account in your balance sheet is also being compromised. If the check has been deposited in the bank by the vendor, this discrepancy will immediately come to light during the process of reconciliation.
Proper reconciliation done periodically makes sure that the Balance Sheet – the most important report for your company – and your income expense statement is correct in all respects.
3. Ensuring transparency in all transactions –
This point proves why through bank sheet reconciliation you hold a tight leash over your company. While general ledger cash is an internal head of account for your company, a bank statement is maintained externally. Bringing together the two is a double check of your company’s finances.
When you are sure that someone else other than your staff and employee has authenticated your accounts (taking bank employees as separate entities) you can be sure of the genuineness of your balance sheet. This also eliminates the possibility of fraud as there is a double check on your cash position.
Apart from bank statements, there are other items to be reconciled before the finalization of balance sheets. Take inventory for example where physical checking of items is often carried out totally with the book figure. Suitable adjustments can be made if the discrepancy is nominal. Other heads where reconciliation is necessary are the accrued liability, accounts receivable and prepaid expenses.
Recommended Post: How Bank Reconciliation Process can Fix Accounting Errors?
Don’t let the task of bank reconciliation weigh you down. It is a complex process best outsourced to professional agencies with vast experience and trained personnel to take care of the process. Get in touch with us at firstname.lastname@example.org for expert bank reconciliation services.
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