Bank reconciliation Vs. Book reconciliation

Bank Reconciliation Vs. Book Reconciliation

The terms “Book Reconciliation” and “Bank Reconciliation” are often used interchangeably in accounting and financial circles.  They are, however, not the same and there are subtle differences.

Book Reconciliation is the superset that includes a variety of data-matching operations involving many documents.  The word “Book” often refers to the general ledger, and book reconciliation is the activity of comparing the entries of the general ledger with other financial documents, both internal and external to the organization.

Bank Reconciliation, is a form of book reconciliation in which the entries in the general ledger are compared with the entries in the bank statement.

In this post, we will look at book reconciliation and its types, including bank reconciliation, and show how all types of reconciliation can work together to help with effective financial management.

What Is Book Reconciliation?

As explained in the introduction, Book reconciliation is the comparison between the general ledger and any other financial document that records the various transactions of an enterprise.  These documents may be internal (like invoices and bills) or external (like bank statements). 

Some internal financial documents include the   General Ledger, Accounts Payable and Accounts Receivable Ledgers, Cash Receipts and Disbursements Journals, Inventory Logs, Fixed Assets Log, Payroll Records, and Budget documents.  External documents, in addition to bank statements, include credit card statements,  Credit Card Statements, Vendor Invoices, Customer Invoices, Loan Agreements, Lease Agreements, Insurance Policies, and  Government Tax Notices. 

The umbrella term “Reconciliation” includes the following types of matching processes:

1. The General Ledger Reconciliation: A general ledger is the record of a company’s ongoing transactions. The data is organized into revenues, expenses, liabilities, assets, and equities. Comparison of the leger data with subsidiary ledgers, journals, and other internal records is known as GL Reconciliation.
2. Bank Reconciliation: Bank statements are provided by the bank as a record of all transactions that involve the bank account.  It typically contains opening balance, credits, debits and closing balance.  Balance reconciliation involves the comparison of all entries in the bank statement with a company’s internal financial records like the GL, and sometimes external documents like the credit card statement.  
3. Accounts Receivable Reconciliation: Accounts receivable (AR) refers to the money owed to the company from customers/clients for good or services offered by them.  It is listed on the balance sheet as an asset.  AR reconciliation is the matching of the AR data with data in customer invoice and other such statements. 
4. Accounts Payable Reconciliation: Accounts payable (AP) is the money owed by the company to vendors or suppliers.  They are listed on the balance sheet as a liability. AP Reconciliation compares the data in AP documents with the vendor invoices and bills. 
5. Inventory Reconciliation: Inventory is the list of items that a company owns or has.  Inventory reconciliation matches the items that are found in the company with the list of items recorded. 
6. Fixed Asset Reconciliation: Fixed assets are items bought by the company for long term possession.  They are usually of high value.  Fixed asset reconciliation involves comparing the actual assets that the company possesses, with the recorded list of fixed assets.
7. Payroll Reconciliation: Payroll records contain all information on salaries, compensations, bonuses, gifts and other benefits offered by the company to its employees.  Comparison of payroll records with data from employee operations, such as time sheets and wage rate is called payroll reconciliation. 
8. Budget and Forecast Reconciliation: All companies frame yearly budgets and forecasts both for strategic planning and for share and stakeholder reports. A comparison between budgeted and forecast amounts and the actual financial status of the company as seen from the GL or bank balance is knwn as budget and forecast reconciliation.  

What Is Bank Reconciliation?

As seen earlier, Bank reconciliation is a type of book reconciliation wherein the bank statement entries are compared against entries on the general ledger or other internal documents.  The process of bank reconciliation involves first checking that the opening balance in the bank statement is equal to the closing balance in the previous bank statement (which has already been reconciled).  This is followed by a field-by-field check of all entries in the bank statement with the GL, and a reverse check of field-by-field entries in the GL with the bank statement. This comparison helps in identifying missing entries in either document, which could in turn point to outstanding payments, deposits in transit, errors in data entry or calculations or unauthorized entries that warrant investigation. Any discrepancy is addressed and the source is identified and rectified. 

The Synergy between Bank Reconciliation and Book Reconciliation

Bank reconciliation can be used along with book reconciliation to promote stringent and accurate financial management. Here are some ways in which the bank reconciliation can work with other forms of reconciliation to benefit an enterprise:

1. Bank reconciliation can only confirm all transactions that have been carried out through the bank, such as through checks, wire transfers etc.  Transactions that involve credit card and cash, for example, would not be reflected in bank statements but must be considered.  Other types of book reconciliation can take these into account and provide a complete picture of all financial transactions.
2. Bank reconciliation helps spot outstanding checks, deposits in transit, and bank errors. Book reconciliation can help spot delayed payments, deferred payments, and such other financial transgressions by clients. The discrepancies in book reconciliation can help in explaining some of the bank reconciliation discrepancies, and vice versa. 
3. Bank reconciliation and book reconciliation both serve as important internal control mechanisms to minimize the risk of errors, fraud, or unauthorized transactions. 
4. The decision-makers of the company can have a better idea of how money flows in and out of the company through the scrutiny of both internal and external financial records.  Thus course corrections may be applied periodically to maximize profit and minimize unnecessary expenditure.

An Example of the Synergy between Bank Reconcilialtion and Other Forms of Book Reconciliation

Here are some hypothetical cases of how companies can use reconciliation to detect anomalies and solve problems. 

Bank Reconciliation:

• In its monthly bank reconciliations to compare its internal ledger records with the bank statement provided by its financial institution, a company identifies outstanding checks that have not cleared, deposits in transit, and bank fees not recorded in its books.
• The company makes a list of these discrepancies and follows up with the bank, the depositor, the creditor and the supplier to check where the block has been.  This helps in designing follow-up activities to clear the block so that all the payments are made (to and by the company) and there are no backlogs that need firefighting later on.

Accounts Receivable Reconciliation:

• On reconciling accounts receivable ledger with customer invoices and statements a company discovers discrepancies such as unapplied payments, overdue accounts, and errors in invoicing.
• The AR team ensures that all invoices are sent out, and those that have been sent and not been paid yet are paid. The AR team communicates with the client/customer about the payment.  Legal action may be initiated if necessary to ensure that the payment is made.

Inventory Reconciliation:

• During a routine inventory reconciliation, a company discovers that its items do not match the inventory records.
• As a first step, the company checks if the record is accurate, and this is done by checking the delivery receipts and invoices from the vendors.  Then, a search is performed for the missing action.  If the problem persists, legal action is taken to recover the missing goods.

Accounts Payable Reconciliation:

• During AP reconciliation, a company finds discrepancies between the amounts paid and the vendor invoices obtained or there are duplicate payments
• To deal with such AP discrepancies, the invoices are tracked, the vendor is approached for clarification. Issues of incorrect pricing and late payments are rectified and compliance with payment terms is enforced.                        

The use of Nanonets for Bank and Book Reconciliation

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Nanonets, is an automation software that can ease the bank and book reconciliation process. Some of the features of Nanonets that make it useful in reconciliation operations include the following. 

1. Nanonets can automatically extract data from various types of financial documents including bank statements, invoices, etc. The extraction is “intelligent” and the extracted data is automatically categorized.  This eases the matching process.  The automated extraction of data also reduces the problems associated with manual data extraction, such as time delays and manual errors.
2. Nanonets can compare data extracted from various documents according to the category. It can flag discrepancies for timely resolution. By automating discrepancy flagging, valuable time is saved, and issues are resolved faster. 
3. Large volumes of financial data can be handled by Nanonets and thus it is suitable for both small and larger enterprises.  The automation of data extraction and matching can free accounting professionals to focus on strategic tasks and value-added activities.
4. Nanonets integrates seamlessly with existing accounting software, ERP systems, and other financial management tools. This facilitates workflow automation without having to revamp the entire system.
5. Bank and book reconciliation with Nanonets can help not only with accurate accounts management but also support strategic decision-making and expansion activities.

Take Away

Bank and book reconciliation processes are a routine part of the operations of the financial team of any enterprise.  Bank reconciliation must be a routine part of the financial management of individuals too.  Such reconciliation processes ensure that the company’s (or individual’s for that matter) financial state is stable, steady, and compliant with rules and regulations.  The use of automation systems like Nanonets can ease the reconciliation process and help companies stay competitive in the business arena.