Cash Reconciliation- What is it and Why Does it Matter?

cash reconciliation what is it and why does it matter

What is Cash Reconciliation?

Cash reconciliation is the business process that verifies the cash balance in a register before shift changes or at the close of business. Understanding the differences between cash reconciliation and bank reconciliation is important as the two terms are often incorrectly used interchangeably.

While a bank reconciliation compares a business's bank statement with your internal general ledger to make sure they are similar, cash reconciliation compares cash balance and cash receipts with one another.

A bank reconciliation may be used to pinpoint bank errors, while a cash reconciliation can be used to detect employee theft or accounting records that are incorrect.

The cash reconciliation process may include the following steps-

1. Create a reconciliation form to be used every time the reconciliation process occurs. Using a standardized reconciliation process leaves less room for error.
2. Note the beginning cash balance on the reconciliation form. If your accounting records require you to do so make sure to list the amount of each bill or coin present.
3. Close the cash register out.
4. List all cash received. Again, if your accounting records require you to do so make sure to list the amount of each bill or coin present.
5. Review cash receipts in order to list out cash balance by payment type. Payment types include cash, credit card, coupons, and check.
6. Summarize any voided sales, returns, and gross sales. Calculate and record your net sales figure.
7. Compare payment type totals and receipt numbers for individual receipts and those based on the cash register.
8. Reconcile any differences between both columns.
9. Make sure to sign and date the reconciliation form before presenting it to a supervisor for review.
10. To complete the reconciliation process a supervisor must also approve the form.

The Importance of Cash Reconciliation

Proper cash reconciliation has many benefits for your business ranging from detection of employee theft to improved cash forecasting accuracy. Various benefits of cash reconciliation include-

1. Alert to fraudulent activities- Whether cash is being stolen by a stranger or one of your employees, cash reconciliation will indicate if any money is missing from your cash register. With an estimated 5% of gross revenue lost to fraud every year, cash reconciliation is essential to your business's financial health.

Small businesses and private companies experience fraud more often than corporations, nonprofits, or government companies. This statistic may be attributed to the lack of security systems in place in smaller industries. Investing in security systems in tandem with a cash reconciliation process can even further identify employee fraud at your business.

A common misconception is that employee fraud is limited to pocketing cash from the register. However, employees can use alternative methods, such as altering physical receipts.

2. Accounting error notifications- Proper cash reconciliation avoids cash balance errors and keeps accounting records as accurate as possible. Make sure to perform cash reconciliation consistently to make sure accounting records are correct and current.

3. Improved forecasting- Knowing business cash balances increases the ability to properly cash forecast. Making decisions based on an incorrect cash balance can cause major short term and long term consequences for your business.

Not only is cash reconciliation a great risk management tool for cash forecasting, but it also assists with keeping your business financial operations organized. When cash forecasting and cash reconciliation work together, your business will likely see cash flow improvements.

Conclusion

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  • There are important differences between bank reconciliations and cash reconciliations. Bank reconciliations compare bank account statements with internal accounting records while a cash reconciliation statement is used to measure the cash balance of your cash register. Many people incorrectly use the two terms interchangeably which can result in confusion and accounting errors.
  • Standardizing the cash reconciliation process for every shift change or close of business increases cash balance accuracy.
  • Cash reconciliation can be used to detect any fraud that is occurring in your business. Fraud alone accounts for a loss of 5% of business gross revenue per year. Small businesses and private companies are victims of fraud more often than corporations, government companies, and nonprofit organizations. This may be a result of the lack of an established security system in place.
  • While many business professionals may assume that employee theft is solely pocketing cash from the register, there are additional methods to consider such as physical receipt alteration. To combat various fraud methods it is ideal to supplement your cash reconciliation process with a security system that includes cameras to monitor cash registers.
  • The cash reconciliation process has benefits for accounting records at your business, including pinpointing any cash balance errors. More accurate accounting records result in better controlled and organized business finances.
  • Forecasting is also improved with an effective cash reconciliation process in place. Easily referencable and up to date cash balances are essential to make sure business decisions are prudent.
  • A combination of cash reconciliation and cash forecasting can greatly improve your cash flow in both the short and long term.