(Money Matters) What is a cash reconciliation and why is it needed? - Kasfia Rashid
Kasfia Rashid - “Money Matters with Kash the Bookkeeper”
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Hello! Welcome to Money Matters- Ask the bookkeeper series, the accounting show answering burning accounting questions! You know, the ones you would only ask your best bookkeeping buddy!
Each show will have one main question from the audience with supporting questions from my various travels. Have a question to ask? Don’t be shy, step right on up. We will follow the same path as last season with two shows on each of the main concepts of accounting and one show for each financial statement!
This week’s main question is: What is a Cash Reconciliation and why is it important? As you may remember from last season the Cash portion of the business is an Asset shown on the Balance Sheet. It is the total amount of liquid ( hard dollars and cents) currency available in all accounts. “Reconciliation” is just a thousand dollar word for “check for mistakes”. Ultimately, a cash reconciliation is the same as balancing your checkbook.
Show Objectives - The Why
What is a Bank Reconciliation?:
Simply put: it's "balancing your checkbook"! By comparing the balance in your bank to what your accounting system thinks is the balance, you increase your chances of catching fraud, decrease the chances of missing expenses, and ensure you always have money in the bank to cover expenses. A bank reconciliation should be completed each month for all bank accounts, credit cards, loans, and third party accounts PayPal/square/etc. Completing a bank reconciliation is the first basic implementation of an accounting process.
What You Need to Know - The What
In accounting, a company's cash balance includes the money in its checking account(s). To safeguard this critical asset, all companies should establish internal controls over its cash accounts. These controls include separating the accounting duties of its employees, depositing all receipts into the company's checking account, paying all bills through the checking account, and having an independent person routinely prepare a bank reconciliation.
The purpose of the bank reconciliation is to be certain that the company's general ledger Cash account is complete and accurate. With the true cash balance reported in the Cash account, the company could prevent overdrawing its checking account or reporting the incorrect amount of cash on its balance sheet. The bank reconciliation also provides a way to detect potential errors in the bank's records.
What Is a Bank Reconciliation Statement?
A bank reconciliation statement is a summary of banking and business activity that reconciles an entity’s bank account with its financial records. The statement outlines the deposits, withdrawals, and other activities affecting a bank account for a specific period. A bank reconciliation statement is a useful financial internal control tool used to thwart fraud.
Bank reconciliation statements ensure payments have been processed and cash collections have been deposited into the bank. The reconciliation statement helps identify differences between the bank balance and book balance, in order to process necessary adjustments or corrections. An accountant typically processes reconciliation statements once a month.
Bank Reconciliation Terminology
A few key terms to keep in mind when completing a reconciliation:
Deposit in transit. Cash and/or checks that have been received and recorded, but have not yet “cleared” the bank. Usually there is a delay of a few days between when a check is deposited and when it is available to use. If this occurs at month-end, the deposit will not appear in the bank statement, and so becomes a reconciling item in the bank reconciliation.
Outstanding check. A check that has been written and recorded, but has not yet cleared the bank account as a deduction from the available balance. If it has not yet cleared the bank by the end of the month, it does not appear on the month-end bank statement, and so is a reconciling item in the month-end bank reconciliation.
Follow these steps each month for a clean, audit friendly reconciliation each time!
What You Need to Do - The How
Completing a bank reconciliation statement requires using both the current and the previous month's statements, including the closing balance of the account. The accountant typically prepares the bank reconciliation statement using all transactions through the previous day, as transactions may still be occurring on the actual statement date.
Bank Reconciliation Procedure
You do not need to have an accounting software to complete a bank reconciliation, but it does make things a bit easier. Grab a pen pencil and paper and let’s get started.
Previous: Season 4 Intro- Top five bookkeeping questions asked
Next: What is depreciation?
Written by Kash the bookkeeper
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