Question

Banking has rapidly evolved and most Americans now review their available bank balances online instead of reconciling their accounts. However, circumstances are different for a business. In YOUR OWN words, and by providing your own unique examples, name three reasons why it is important for a company's accountant to reconcile its bank account. Remember, your examples should reflect your understanding of this important process, including what might happen if a company did not reconcile its accounts.

Answer 1

The Importance of Reconciling

A regular review of your accounts can help you identify problems before they get out of hand. You won't receive protection for business bank accounts as you would for consumer accounts under federal law, which means you can’t count on the bank to cover fraud or errors in your account.

Catch Fraud Before It's Too Late

Make any signs of fraud your priority when reconciling the transactions made in your bank account.

• Were legitimate checks that you issued duplicated or changed, resulting in more money leaving your checking account?
• Were checks issued without authorization?
• Are there unauthorized transfers out of the account, or has anybody made unauthorized withdrawals?
• Does the account have any missing deposits?

Prevent Administrative Problems

Reconciling your account also helps you identify account management or administrative issues that need attention. For example, you might need to reevaluate how you handle cash flow and accounts receivable, or perhaps change your recordkeeping system and the accounting processes you use.

Proper processes for managing your banking transactions result in outcomes such as the following:

• Knowing how much cash you really have available in your accounts
• Avoiding bounced checks (or making failed electronic payments) to partners and suppliers
• Avoiding bank fees for insufficient funds or using up lines of credit when you don’t really need to
• Knowing if customer payments have bounced or failed and if any action is needed
• Keeping track of your outstanding checks
• Making sure every transaction gets entered into your accounting system properly
• Catching any bank errors

Best Time to Reconcile

It’s wise to review your accounts at least monthly. For high-volume businesses or situations with a higher risk of fraud, you may need to reconcile your bank transactions even more often. Some businesses reconcile their bank accounts daily.

You can also build protection into your bank accounts, and your bank can provide useful ideas. For example, many banks offer a solution called Positive Pay, which prevents your bank from approving payments out of your account unless you have previously notified them of the payment.

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