DISCUSS THE RELEVANCE OF BANK RECONCILIATION
IN AN ICT ENVIRONMENT
The meaning of
Relevance
According to dictionary, it is defined as the
quality or state of being closely connected or appropriate. Seen as the form of
the adjective relevant which means important at hand.
It can however be also defined as the concept
of one topic being connected to another topic in a way that makes it.
The meaning of Bank
A bank is a financial institution licensed to
receive deposits and make loans. It may also provide financial services such as
wealth management, currency exchange and safe deposit boxes and mostly
regulated by the national government or central bank.
It can also be defined as an organization
where people and businesses can invest or borrow money, change it to foreign
money, etc.
The meaning of
Reconciliation
This is defined in the dictionary to be the
restoration of friendly relations. However, it can also be defined as an
accounting process that compares two sets of records to check that figures are
correct and in agreement and also confirms that accounts in the general ledger
are consistent, accurate, and complete.
The meaning of ICT
This is an acronym that stands for Information
and Communication Technologies. However, it refers to technologies that provide
access to information through telecommunications and similar to Information
Technology IT, but only concerned or focuses primarily on communication
technologies and enables users to access, store, transmit, and manipulate
information.
The meaning of
Environment
This is simply defined as the circumstances,
objects, or conditions by which one is surrounded.
Bank
Reconciliation
When you reconcile your
bank account, you compare your internal financial records against the records
provided to you by your bank. A monthly reconciliation helps you identify any
unusual transactions that might be caused by fraud or accounting errors, and
the practice can help you spot inefficiencies.
How
Bank Reconciliation Works
To reconcile your
accounts, compare your internal record of transactions and balances to your
monthly bank statement. Verify each transaction individually, making sure the
amounts match perfectly, and note any differences that need more investigation.
Make sure that your
bank statements show an ending account balance that agrees with your internal
records. If the amounts don’t match, you need an explanation for the
difference.
The process can be as
formal or informal as you'd like, and some businesses create a bank
reconciliation statement to document that they regularly reconcile accounts. If
you don't complete the process monthly, you can perform it daily, quarterly, or
for any other period you choose.
Where to gather
information: Your accounting system should contain all of the internal
transaction data you need, or you might keep your records in a check register
(whether electronic or on paper). Your bank can provide online access to your
account, allowing you to view and download transactions regularly for
comparison. Some online accounting programs partially automate the process,
although you still need to oversee the process.
If you’re familiar with
balancing your checkbook, then you’re already familiar with bank
reconciliation. You’re essentially doing the same thing for the same reason.
What if something
doesn’t match? It’s normal to see minor differences due to timing, including
items that haven't yet cleared the bank, but you should be able to easily
explain those differences. For example: You might write a check to a vendor and
reduce your account balance on internal systems accordingly, but your bank
shows a higher balance until the check hits your account. Those checks are
known as outstanding checks.
An automatic electronic
payment might clear your account a day before or after the end of the month,
and you might have expected to see it in a different month. When you can easily
account for discrepancies, there’s probably no need to worry.
The
Importance of Reconciling
A regular review of
your accounts can help you identify problems before they get out of hand.
Business bank accounts
receive less protection than consumer accounts under federal law, so it’s
especially important for businesses to stop problems quickly. You can’t
necessarily count on the bank to cover fraud or errors in your account.
Catch
Fraud before its Too Late
Signs of fraud should
be your priority when reconciling transactions 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 did anybody make unauthorized
cash withdrawals? Does the account have any missing deposits?
Prevent
Administrative Problems
Reconciling your
account also helps you identify internal 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 lines of credit when you don’t
really need to
- Knowing
if customer payments have bounced or failed, and determining if any action
is needed
- Keeping
track of your outstanding checks and following up with payees
- Making
sure every transaction gets entered into your accounting system properly
- Catching
any bank errors
Advantages
and Disadvantages of Bank Reconciliation
In bank reconciliation,
the bank statement balance is reconciled, with the book bank account balance in
the client’s books of accounts, resulting to the tallying of the two balances,
where the calculated adjusted bank balance should be equal to the figure of the
adjusted book bank balance. It involves a structured process of preparation,
where forms, which contain pre-printed items, should leave out omission errors
and are found on the back side of the hard copies of your monthly bank
statement, making the entire process easier. However, this process also has its
own set of drawbacks that should be looked into. Here are the advantages and
disadvantages of bank reconciliation:
Advantages
of Bank Reconciliation
1. It makes accounts to be in good standing.
Keeping your account in
good standing through bank reconciliation means that, when you are aware about
the amount that you can spend in your account, you are less likely to overdraw
the account, which means withdrawing or attempting to withdraw more money than
what your account have. Keep in mind that overdrawing will negatively affect
your credit score and can prompt the bank to charge you fees. While some
financial institutions offer overdraft protection, most often they would charge
you or your company a fee for using such a service. And if you do not have such
type of protection on your account, you will suffer worse consequences.
2. It prevents theft.
As you are going to
compare your bank book’s transactions with the bank’s financial transactions,
you will be able to spot transactions that are recorded by the institution, but
are not in your records. As you can see, recording bank fees is a standard
practice as you process your reconciliation, though it might a transaction that
you have overlooked to record. By examining further the available original
documents, these discrepancies will be revealed. Most importantly, this will
reveal bank transactions that were initiated by unauthorized individuals who
try to steal money from your account.
3. It will keep mistakes at bay.
You will know that a
bank is reliable when it implements procedures to avoid making mistakes in your
account, but unfortunately, mistakes do happen sometimes, with the most common
being a simple entry error. Nevertheless, banks will be able to correct these mistakes
when you point them out after you complete your reconciliation.
4. It helps you detect accounting errors.
By reconciliation, you
will be able to detect accounting errors that commonly occurs in business, such
as double payments, addition and subtraction errors, missed payments and lost
checks. For example, if you have mistakenly recorded an invoice as “paid” on
your ledger, bank reconciliation can reveal that you have forgotten to write
the check. There are also cases where your bank committed an error in your
favor, so you will be liable to return that money, even if you have already
spent it.
5. It achieves accurate balance.
A bank reconciliation
will reveal which cash transactions have been cleared with the bank and which
of those are still outstanding. While a check is the most common form of
transaction that would remain open at the end of the statement period, the bank
may not clear it as of the ending date of the statement if you made a deposit
at the end of the month.
Disadvantages
of Bank Reconciliation
1. It can create checks that clear the bank after being voided.
As you may have noticed
when making check transactions with your bank, if a check has remained
“un-cleared” for a long period of time, you might have to void it and issue one
for a replacement. Now, if a payee has cashed the original check that you have
voided with the bank, the institution should reject it when the payee presents
it. However, if you failed to void it, then it must be recorded with a credit
to your cash account and a debit that indicates the reason for the payment,
such as a decrease in a liability account, an increase in a cash account or an
expense account. In a general sense, you should void such an un-cleared check
with the bank at ounce if the payee has not yet cashed the replacement check,
or you will be making a double payment that will require you to pursue
repayment with the payee for the second check.
2. It can issue un-cleared checks that continue not to be presented.
As stated above, bank
reconciliation creates un-cleared checks, which are residual checks that are
not presented for payment for a long period of time or are never presented for
payment at all. That is why you should treat them similarly as other un-cleared
checks even if it is just in a short term, with you keeping them in the listing
of un-cleared checks in your accounting to make them as ongoing reconciling
items. In the long term, you should ask the payee if he/she ever received the
checks to decide whether you need to void them and issue new ones.
3. It risks changes in the dates covered by the bank statement.
Another drawback with
bank reconciliation that can cause problems is that bank statement dates can be
altered in order to include or exclude some items. This situation can arise
when someone at your company requests the bank to change the closing date for
your bank account, which can lead to fraud.
4. It makes possible that deposited checks will be returned.
In some cases, your
bank would refuse to deposit your check for reasons like you have drawn it on a
foreign bank account. This means that you need to reverse the original entry on
that deposit, which will become a credit to your cash account to reduce cash
balance. Remember that this comes with a corresponding increase in your accounts
receivable account.
5. It risks having missing transactions.
Bank reconciliations
can have missing transactions. This can be caused by transactions that have
been modified while reconciliation is still on process or transactions that
have been reconciled in another method of reconciliation.
In conclusion, bank
reconciliation is carried out in an ICT environment to introduce effective
transparency and efficiency into a business’s accounting system, but it does
have some drawbacks that you should be aware of. By doing so, you will be able
to avoid problems along the way.
