Understanding your Bank Statement

One of the key controls a business can have within its finance function is the monitoring and management of the company’s Bank Statements.

For accounting, bookkeeping and compliance services, the importance of this cannot be understated. All monies coming in and going out of a company should be monitored and recorded accurately at the bank account level.

In this article, we outline why the Bank Statement is so important for a company’s finances and accounts. We also outline how advancements in online banking facilities can make this critical activity much more accessible for business owners, managers and accountants!

What is a Bank Statement?

The Bank Statement contains the entire list of financial transactions that have gone through a bank account over a defined period of time. It is a schedule of all funds passing through (i.e. going in and out) the company bank account.

The Bank Statement is usually issued to the company by its bank on a monthly basis.

The Bank Statement will identify the account owner, account type, banking period, all transactions involving the bank account, and the beginning balance (from the previous period) and closing balance (from the current period) for the month.

Details relating to each specific transaction are also included on the Bank Statement, such as the total transaction value, date, description of transaction and the remaining balance after each transaction.

Examples of common categories of Bank Statement transactions include:

• Bank Deposits – Funds that have been lodged into the bank account.
• Bank Withdrawals – The withdrawal of funds from a bank account.
• Other Bank Credits – For example, collections made by the bank on behalf of the account owner.
• Other bank deductions – This might include bank charges, such as bank service charges, loan repayments to the bank deducted from the account, checks deposited but drawn against insufficient funds and/or defective checks.

Debits and Credits

When discussing a Bank Statement, or indeed, any type of financial account, you will regularly hear reference to the terms “debit” and “credit”. In fact, you will see these terms at the very top of the primary columns within your Bank Statement.

So what are debits and credits? What are the debit and credit columns? As always, an example is the best way to explain this!

Firstly, it’s important to understand that an entry in the credit column of a Bank Statement is equivalent to an increase of the funds in the bank account. Consequently, a debit entry would be a decrease.

So, a cash deposit of ₱10,000 would be entered as an increase or debit in the cash account (an asset for the company). To satisfy the rule of double entry accounting, the corresponding entry would be a credit to the bank account balance in the amount of ₱10,000. The Bank Statement would then show a credit of ₱10,000 in the credit column.

In another example, a cash withdrawal of ₱8,000 makes for a debit of the same amount to the bank account balance (and a debit entry in the Bank Statement). A corresponding entry needs to be made as a credit to the cash account.

Here are just some of the common entries that might appear in the credit and debit columns of a Bank Statement:

Credit Column

• Bank deposits
• Inward wire transfers
• Collections made by the bank or deposits from the account holder’s clients that are accepted by the bank
• Proceeds received from a loan credited to the account

Debit Column

• Bank withdrawals
• Direct debit payments (outward)
• ATM withdrawals
• Bank service charges
• NSF (no sufficient fund) or DAIF (drawn against insufficient fund) checks. These are checks already received by the bank but subsequently returned due to insufficient funds.
• Loan payments back to the bank. Payments for matured loans which the account holder owes the bank may be deducted directly from the account balance.

Bank Statements and your Accountant

The Bank Statement should be the official record of the financial activities of a company during a particular period. Your accountant or bookkeeper will use the Bank Statement as a reference to verify the funds that have actually gone in and out of the business.

This is where the financial control element comes in. If, for example, a company takes in sales revenues of P2,000,000 in a particular month but the Bank Statement shows that only P500,000 was deposited in the bank, this should be an immediate red flag for the accountant or finance team. Further, if the Bank Statement is showing payments leaving the bank account to pay vendors, but no documentation exists to support these disbursements, this would be another item for examination.

Here are just some of the ways in which your internal finance team or outsourced accountant or bookkeeper can add value to the finance function of your company through vigilant monitoring of the company Bank Statements:

• Cash flow management. The Bank Statement shows all funds coming in and going out of a company bank account. By comparing the company’s own Book of Accounts against the Bank Statement with actual sales receipts and cash disbursements, a business can prepare a more accurate cash flow plan.
• Detection of errors and fraud. By paying particular attention to the dates, amounts and descriptions of transactions in the Bank Statement each month, an accountant can help identify the presence of unusual activity. For example, an outstanding check that hasn’t been cashed for a long period of time should raise warning signs. Large infrequent transactions or payments made to directors, officers and/or employees should also be examined to ensure the correct supporting documentation has been generated and that the right disclosures and authorizations have been obtained.
• Data analysis. Through an analysis of the Bank Statement, an accountant can identify regular transactions, unnecessary expenses, areas for cost savings, as well as tracking and forecasting frequency and timing of client payments.
• Loan Applications – When a company is applying for a loan, the lender may request to review the company’s Bank Statements over a defined period of time.
• Investors – Historic Bank Statements may be required for review during a due diligence process when buying or selling a business. Issues, errors or discrepancies within a Bank Statement can result in a due diligence red flag. Here’s some other items that investors and stakeholders will consider when examining your company finances.
• Audit Preparation. Banks Statements relating to a particular period of time will usually be requested by a company’s auditor in preparation for Audit Season. The production of a Bank Statement may also be requested by the BIR during a BIR Audit.
• Bank Reconciliation. This is a critical internal financial control that helps a company to compare the difference between the cash coming in and going out and the actual bank balance (see below).

The Bank Reconciliation Process

Bank reconciliation is a key financial control and process that matches book credits with bank withdrawals and book debits with bank deposits. The purpose of this is control is to reconcile any discrepancies between the Bank Statement and the Book of Accounts.

The Bank Reconciliation also helps to determine how much cash a business actually holds at a particular point in time (i.e. not on paper or theoretical).

The Bank Statement is obviously critical to this process. At CloudCfo, we perform bank reconciliations for our clients on a regular and consistent basis. This ensures that, on an ongoing basis, all financial transactions of the company are being monitored, tested and verified. Business owners and founders can therefore be confident with the financial information they receive about their business.

To understand why bank reconciliations are so important for a business, check out our recent article on Bank Reconciliations: Why it matters?.

For a more detailed exploration of the actual bank reconciliation process, check out our step-by-step guide to the bank reconciliation process.

Benefits of Online Banking Applications

The advancements in banking and finance technology now enables companies to perform the large majority of their banking transactions online – depending on the particular bank obviously.

Companies can now easily review their most recent Bank Statements through online banking applications. Banking records can be accessed from almost anywhere – provided there is an internet connection.

There is no longer a need to wait for paper Bank Statements to arrive at the end of each month. In fact, companies can review their bank accounts in real-time. Electronic banking has become a real time and cost-saving alternative to the traditional form of banking.

The real-time access that online bank applications provide allows companies to identify any adverse actions that may arise from error or fraudulent acts immediately.

So companies now have a choice of two methods when conducting a bank reconciliation:

1. The traditional way – this involves the entry of data and information into spreadsheets and the subsequent manual matching of books and bank records.
2. The modern/progressive way – using cloud accounting solutions to do the work for you. A company’s financial data will be hosted on remote servers or “the cloud”. Modern online accounting solutions can then process a company’s data, identify discrepancies in accounts and generate a bank reconciliation statement. Fully automated! Check out our recent article on how technology is changing the world of accounting, bookkeeping and finance services.

CloudCfo – The outsourced provider of accounting, bookkeeping and finance services in the Philippines

CloudCFO offers outsourced accounting, bookkeeping and finance services to businesses across the Philippines.

We are process-driven, output-focused and technology empowered!

For our clients, we review all existing banking facilities and advise on ways to optimise the use of online banking.

We perform quarterly and monthly closing activities, including bank reconciliations, for our clients. Through this critical financial control mechanism, we ensure transparency within the company’s finance function.

For more information about our services, visit www.cloudcfo.ph or contact the team directly at hello@cloudcfo.ph. Let us know about your company, your business model and your existing requirements and we will explain how our team can help your business grow!