Automated bank reconciliation is now a natural part of the process of compiling correct accounts for many companies. IT systems have replaced the manual, time-consuming work, but reconciliation documentation is still needed and is mandatory according to the law and has to be used for the audit.
The documentation requirement remains unchanged
Continuous reconciliation of borrowing accounts and credit facilities at the bank is an important element of control for any business. It helps ensure that annual or interim accounts are correct and a true representation, and a vital part of the controls designed to prevent errors and fraud. How often the bank reconciliation is performed depends on the circumstances of the company.
Manual reconciliation is often time-consuming
Bank reconciliation is based on comparison of bookkeeping entries with bank registrations on a given date. This identifies circulating deposits – i.e. payments entered in the books which have not yet reached the bank on the reconciliation date, e.g. a retail sale paid by debit card. Transactions registered by the bank which have not been entered in the books will also be identified. Manual reconciliation is usually performed on spreadsheets, and is normally a time-consuming job. The growing number of bank transactions means that it has become even more complicated in recent times. The increased use of debit cards, online banking and direct debit schemes are not the only thing which have caused the increase in complexity, the advance functions in financial management systems have also contributed. Just think about the daily payments the large retail chains receive via debit and credit cards, newspapers’ quarterly subscription payments or benefit payments made by local authorities for instance.
Major time savings from automating the process
Consequently, more and more enterprises are using dedicated IT systems to automate the process for bank reconciliation. Using programmed logic and predefined parameters, they identify discrepancies between bank entries on the enterprise’s accounting system and registrations at the bank, based on entering bank data. In fact, in the same way as for manual checks. In addition, there is easier access to printed reports, and to ensure that the reconciliation is performed uniformly and with the same level of quality.
What is a bank reconciliation from an accountant’s point of view?
Identification of the differences between book entries and bank registrations is not reconciliation from the accountant’s point of view. It becomes reconciliation when the enterprise has documented that there is a balance between the bank account balance according to the books, and that at the bank on the day of reconciliation after regulation of the discrepancies identified. Furthermore, the enterprise has to have checked and considered what the discrepancies refer to – and have documented that. This corresponds to the accounting requirements in the Danish Bookkeeping Act.
Requirements for the documentation of bank reconciliation
When an enterprise uses an IT system to automate the bank reconciliation process, the documentation for each reconciliation must include:
- The result of the automatic identification of discrepancies, with clear identification of the amount where there is no agreement (match) between book entries and bank registrations.
- Indication of data source and the period the search refers to, and the date on which bank reconciliation was performed.
- Documentation of the bank balance on reconciliation date, in the form of a bank statement or extract from an online banking system.
- A statement showing a balance between the bank balance and books, and at the bank on reconciliation day, and how it arose.
- Documentation for circulating deposits, e.g. by checking bank registrations a couple of days after reconciliation day.
- Documentation for conclusion of the checks performed to identify amounts deposited or paid out of the bank account, but not entered in the books. Documentation concerning the last point is particularly important, as these discrepancies can indicate a breach in day-to-day bookkeeping procedures.
To ensure they comply with the above documentation, all enterprises have to have written procedures with reconciliation instructions. If a system for automatic reconciliation is used, it should be able to implement such instructions. This enables the management and accountant to easily obtain proof that procedures are being followed, using the system’s log files etc. A quick overview is provided as to who has made what changes – and when. Furthermore, the automatic reconciliation system should be able to document changes in rules and settings.
System documentation is also necessary
The enterprise should have an overall description of the IT system’s functionality, and how the data from bookkeeping and bank are transferred to it (system integration). Documentation of the configuration is also necessary, including the criteria for identification of discrepancies between book entries and bank registrations. If the enterprise uses a system which has not been specifically developed for it – which is common – this documentation can often be requested from the supplier without any problem.
Enterprises have to have checked and considered what the discrepancies refer to – and have documented that. This corresponds to the accounting requirements in the Danish Bookkeeping Act.
Per Sloth, Partner, IT Accounts Manager, BDO Public Chartered Accountants.