Bank reconciliation is a task that sounds boring even before you know exactly what it is. As a business owner who already has too many tasks and not enough time, it’s easy enough to just take a pass on something that sounds so dull.
Unfortunately, skipping out on bank reconciliation is not something you can afford to do. With this post, we’d like to give you a quick introduction to the concept of bank reconciliation and why it’s an essential part of your ongoing accounting and bookkeeping activities. Let’s get started!
What is small business bank reconciliation?
Completing a bank reconciliation is pretty simple. Each month, your business will be involved in a number of transactions that see money both coming in and going out. Those transactions should all be logged in an accounting system such as QuickBooks or Xero. Also, those transactions are going to make their way through your bank account (or accounts), usually a day or two after they occur. The process of bank reconciliation is nothing more than confirming that what appears on your bank statements matches what you see in your accounting software.
How does bank reconciliation work?
While bank reconciliation can be performed at any chosen periodic interval, it is most commonly handled as a monthly task. Your bank generates a monthly statement anyway, so that is the perfect opportunity to compare that statement to your internal accounting records.
The details of doing a bank reconciliation will vary from software to software, but the basic process is the same across the board –
- There will be a bank reconciliation section within your chosen accounting software interface.
- Checks and deposits from the previous months will appear in this area, and those that are found on the bank statement can be checked off.
- Bank service fees may not yet be in the accounting system, so those can be pulled from the bank statement and added at this time.
- Any discrepancies between the bank statement and the accounting software will need to be resolved. Often, discrepancies are the result of checks that have recently been sent or deposited and have not yet cleared the bank.
Why is bank reconciliation important?
It’s easy to take bank reconciliation for granted, thinking that your accounts are going to match up properly each time. And hopefully, most of the time, that will be the case. But bank reconciliation remains vital because of some of the issues that can be spotted when going through this process. Some potential discoveries that can be made through periodic bank reconciliation include –
- Fraud. This is perhaps the most important reason of all to reconcile bank statements regularly. If a deposit is registered in your accounting software, but it never lands in the bank, where did it go? You want to spot this kind of issue right away so you can look into it further. There may be a legitimate, honest mistake that led to the missing deposit – or the money could have been stolen.
- Missing check. If you send a check to a vendor, for example, you want to be sure that they received that check in an appropriate amount of time. If it still hasn’t cleared your bank a couple of weeks after it was sent, you may want to follow up to confirm that they received it. Without bank reconciliation, you would miss this point and may receive a past due notice from that vendor in the near future.
- Check doesn’t clear the bank. When the account that a check is drawn on doesn’t have the necessary funds to cover that check, it will “bounce”. Therefore, the entry in your accounting system will need to be reversed, because the deposit didn’t actually go through. Also, there may be a fee charged by the bank that needs to be recorded as part of this problem.
There are many reasons why an accountant is important, and performing regular bank reconciliations is high on that list. This is one of the best tools you have available to stay on top of the financial activities that take place in your business.
What is included in a bank reconciliation statement?
When the bank reconciliation process is completed, a bank reconciliation statement can be produced. That statement is basically a summary of the reconciliation, and it will highlight the reasons for any discrepancies between the bank balance and the cash balance in the accounting system. Elements that can typically be found on a bank reconciliation statement include –
- Bank balance. The balance provided on the bank statement will be noted, along with the date of that balance.
- Additions and deductions. Any deposits in transit or checks going out that have not yet reached the bank will be noted on the statement and adjusted from the bank statement balance.
- Bank activities. Events that occurred on the bank side and that have not yet been accounted for in the company’s books will also be shown on the reconciliation statement. Examples can be money collected by the bank on behalf of the company, or fees and charges that are owed to the bank and come out of the account.
- Adjusted cash balance. This is where the bank reconciliation statement shows that the books are in order – the adjusted cash balances should match when all outstanding transactions have been included.
Top tips for bank reconciliation
Before we wrap up this discussion, we’d like to pass on three quick tips to help make bank reconciliation a useful part of your accounting process.
- Make it regular. It’s essential that bank reconciliations are completed at regular intervals. For most small businesses, that is going to mean once per month – but you can adjust this schedule based on your needs.
- Keep your books up to date. Performing a bank reconciliation will take much longer if you need to update your internal books from the previous month before you can compare those records to the bank statement.
- Take your time. If performing the reconciliation on your own, set aside enough time so you don’t need to rush through the task. Doing it quickly is going to greatly increase the chances of a mistake.
Understanding the importance of bank reconciliation and making time in your schedule to complete this task are two different things. All the motivation in the world can’t magically open up time for you to spend going over bank statements and clearing up any issues.
This is where Xendoo comes into the picture. Bank reconciliation is just one of our many bookkeeping services, so we can take this and more off of your plate each month. Contact us today to learn more!