Home Pros and Cons 10 Advantages and Disadvantages of Bank Reconciliation

10 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:

List of 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.

List of 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, a 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.

Basically, bank reconciliation is carried to introduce 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.