Cash reconciliation is the process of reviewing a company’s cash movement through bank reconciliations or cash flow statements. Bank reconciliations involve comparing bank statements to the company’s cash account, while cash flow statements show cash flows from operating, investing, and financial activities. The process helps businesses determine their available cash balance and correct any errors before preparing an internal bank reconciliation report.
Cash reconciliation is an accounting activity in which the company’s accountants will review the general ledger and calculate the movement of cash within the company. Two common reconciliation methods are classic bank reconciliations and the cash flow statement, which is an internal accounting report. The cash flow statement is only required for companies that use the accrual accounting method. Accruals-based accrual reporting that occurs regardless of when cash changes hands. Therefore, a money reconciliation process helps businesses determine their available cash balance.
Completing traditional bank reconciliations involves comparing a recent bank statement to the company’s cash account. While most reconciliations are done monthly, organizations with high transaction volumes can complete them weekly or daily. Weekly and daily reconciliations typically require access to a bank’s online account information to complete this task.
The accountants will complete the cash reconciliation process by marking up all the matching items between the bank statement and the general ledger cash account. Any differences will need research to confirm that the transactions are legitimate. Incorrect accounting entries, not accounted for bank fees or other errors will need to be corrected before completing the bank reconciliation. Once the accountants correct all cash related matters, they will prepare the internal bank reconciliation report for analysis by owners and managers.
The cash flow statement — another common cash reconciliation process — typically takes longer and is part of a company’s monthly balance sheet. Whereas bank reconciliations review individual transactions in a company’s cash account, the cash flow statement represents a more general approach to cash reconciliation. Most businesses use this tool to check if the business is generating cash, although it does allow for a reconciliation process. Cash flow statements contain three sections: operating, investing and financial.
The operating section contains all the cash flows arising from the normal business operations of a company. Cash receipts from the sale of goods and services, interest received on accounts receivable, dividends received, bills paid or interest payments, and payroll all fall under this section. Most businesses will identify general ledger accounts that impact cash by grouping them with similar account numbers or by pre-programming an accounting software application to bring this information together.
Investing activities include the sale of assets, loans made to suppliers or received from customers, and payments related to a merger or acquisition process. The financial section of the cash flow statement includes cash inflows from long-term investments such as equity or debt securities.
The cash flow statement removes all non-monetary transactions recognized in a company’s general ledger. Company owners and executives can therefore only see transactions that are directly related to the company’s cash flow, which helps to reconcile budgeting or other activities where money plays a primary role in the company.
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