The Essential Guide to Bank Reconciliation for Startups 

The Essential Guide to Bank Reconciliation for Startups

Being an entrepreneur of a startup, when you are running short of funds, you need to juggle various tasks of your company in order to take your business on the path to success. Irrespective of core skills, you should know in and out of your business finance. This becomes important when you smell fraud in your company’s finances because it can help you understand how and when it happened. One of the most effective ways to find fraud is bank reconciliation

In this blog, we will discuss what a bank reconciliation statement is, the types of bank reconciliation, and its terminology. Keep on reading. 

What is Bank Reconciliation? 

Bank reconciliation is a process of comparing and reconciling a business’s financial records with bank statements to check the consistency and accuracy of financial statements. This process confirms that purchases and transactions are made in a company with the data recorded in the company’s bank statements. 

With this process, you can find errors in your financial records and reconcile them by making necessary corrections. Not all errors are due to omission or data entry errors; they could result from theft or fraud. 

Thus, we encourage you to reconcile your bank statements periodically to ensure that there is no fraud in the company. A reconciliation process is also carried out to bridge the accuracy gap between the company’s financial records and the bank statements. Accurate financial records help the company sail through audits and other official financial inquiries easily. 

Important Terms to Know Before Doing Bank Reconciliation 

There could be many reasons behind the discrepancy in the company’s record. In order to do bank reconciliation perfectly, you should know the meaning of the terms which are explained below: 

Deposit in Transit 

When a company receives a payment in cash or cheques, it must be deposited in the bank account. If the deposited cheque is passing through the clearing process, it may not be reflected in the bank statement. This is known as a deposit in transit. 

Outstanding Cheques

An outstanding cheque is a cheque that has been collected from the client but has yet to be deposited into the bank account or has not cleared through. The other way around is a cheque that has been issued to the recipient but has not been deposited in the bank. 

NFS Cheque

When a company deposits a cheque received from a customer but somehow fails to complete the transaction due to insufficient funds, the cheque gets ‘bounced’. NFS or Non-sufficient fund is a banking term used when a cheque is bounced. Sometimes, a payer is penalized when a cheque is bounced from his/her bank account. 

Types of Bank Reconciliation 

Following are the different types of bank reconciliation a company does to find discrepancies in its financial statements: 

Internal reconciliation — In this type of reconciliation, financial entries between two departments of the same company. 

External reconciliation —  Under this type of reconciliation, accounts of different entities are compared, such as a business and its bank or two other businesses. 

Aggregate reconciliation — This type of reconciliation involves verifying multiple accounts and then cross-checking with a single set of records. It is utilized to check the accuracy of financial statements. 

Importance of Bank Reconciliation 

A business will survive only when it has sufficient funds to fund R&D, marketing, and manufacturing activities. Bank reconciliation is the process of knowing whether a company has funds available to finance something or should hold back. 

The following are the points that signify the importance of bank reconciliation: 

Understanding cash flow

Before making any investment plans or scale, a business needs to understand its cash flow. This understanding is crucial for making any financial decisions. The process of reconciliation provides an actual knowledge of a business’s cash flow, which is one reason why it is done. 

Boost business confidence 

Inaccurate financial data is a nightmare for a company, especially for those planning to expand or diversify their business. Incomplete financial data leads the decision maker in the wrong direction and may cause the business to lose money. When your financial records are fully updated, it gives confidence in the decision and is deemed to favor the business. 

Tracing frauds

If you want to trace fraudulent activity in your business, you should verify each entry with a bank statement. You should also regularly do bank reconciliation to ensure no fraud in your business. 

How to do Bank Reconciliation with Munim Financial Accounting Software 

Step 1 – Enter your bank details 

Step 2 — Import bank statement with which you want to verify company’s financial data 

Step 3 – Once the statement is uploaded successfully, software will categorize unmatched entries. 

Final Words 

After reading this blog on bank reconciliation statements, we hope you know all the details. If you don’t want to do bank reconciliation manually, we recommend you sign up using Munim accounting and billing software. With Munim, bank reconciliation statements can be automated effortlessly. And the best thing is to subscribe to Munim financial accounting software for free until 31st March 2025. 

FAQs

Q. What are the steps to make a bank reconciliation statement? 

Ans. Following are the steps to make bank reconciliation statement: 

  1. Get your bank statement
  2. Get business records 
  3. Determine the starting point 
  4. Check all bank deposits 
  5. Check the income on your books 
  6. Check all bank withdrawals 
  7. Check all expenses on your books 
  8. Cross-check the ending balance

Q. Why should we do bank reconciliation? 

Ans. The purpose of reconciliation is to compare the inflow and outflow of funds from a bank account with the company’s ledger. 

Q. What is the formula for bank reconciliation?

Ans. The formula for reconciliation is (Cash account balance per your records) plus or minus (reconciling items) = (Bank statement balance).

mehul.jagwani

About the author

Mehul is a content writer with a heart of nomad. He is currently working with Munim ERP Pvt. Ltd. as a content writer and he is passionate about Quantum Mechanics, Christopher Nolan's movie and Traveling. His weekends are well spent with his Golden Retriever recharging him with cuddles and strolls.

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