Cash reconciliation is an accounting activity where company accountants will review the general ledger and calculate the movement of cash within the business. 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 necessary for companies using the accrual accounting method. Accrual based accounting records transactions as they occur regardless of when cash changes hands. Therefore, a cash reconciliation process helps companies determine the on-hand cash balance.
Completing traditional bank reconciliations involve 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 will typically require access to a bank’s online account information to complete this activity.
Accountants will complete the cash reconciliation process by marking off all items that match between the bank statement and the general ledger cash account. Any differences will need research to confirm the transactions are legitimate. Incorrect ledger postings, unaccounted for bank fees or other errors will need correction prior to completing the bank reconciliation. Once accountants correct all the cash-related issues, 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 more time and is part of a company’s monthly financial statements. Where bank reconciliations review the individual transactions contained in a company’s cash account, the cash flow statement is a more overarching approach to cash reconciliation. Most companies use this tool to review how well the company generates cash, although it does allow for a reconciliation process. Cash flow statements contain three sections: operating, investing, and financing.
The operating section contains all cash flows from a company’s normal business operations. Cash receipts from the sale of goods and services, interest received on notes receivable, dividends received, bills paid or interest payment made, and payroll all fall under this section. Most companies will identify general ledger accounts affecting cash by grouping them together with similar account numbers or preprogramming an accounting software application to pull this information together.
Investing activities involve the sales of assets, loans made to suppliers or received from customers and payments related to a merger or acquisition process. The financing section of the cash flow statement includes cash inflows from long-term investments such as equity or debt securities.
The cash flow statement strips out all non-cash transaction found in a company’s general ledger. Business owners and managers can then see only the transactions directly related to the company’s cash flow, which helps reconcile the budget or other activities where cash plays a primary role in the company.
