Reconciling your bank statement with your bookkeeper’s records doesn’t sound like much fun. In fact, it can be quite a boring affair.
Like many other things in the world of accounting, however, regularly performing bank reconciliations helps you make sure your cash records are accurate. This could protect you from overdraft fees and bounced checks, as well as helping you protect yourself from fraud!
Let’s start at the basics. What is a bank reconciliation?
Did your parents ever collect all their receipts on the last Sunday of every month and sit there totting up every expenditure, making sure it matched their bank statement? This process is pretty similar to a bank reconciliation.
A bank reconciliation for a small business involves making sure the bookkeepers records for a cash account match the information corresponding on your bank statement. As a bank statement records all transactions made through the respective bank for the previous month, and the bookkeeper’s accounting records track all financial transactions for any given period, these two statements should correspond with one another.
Secondly, why is reconciling your bank statement so important?
As mentioned above, your bank statement and your bookkeeper’s records should match. If they don’t match and there’s some discrepancy between your own records and those supplied by the bank, something could be going wrong! You could be a victim of fraud and checking whether these records match could help you detect it and prevent further loss.
Further, if you’re using a cash accrual system of bookkeeping – where you record financial transactions in anticipation of the receipt of cash – you may notice a customer has not yet paid what they owe.
Completing a bank reconciliation helps you keep an eye on accounts receivable, which can easily be forgotten about when it comes time to check your records.
Finding a lower cash balance than you expect could be down to any number of things, but bank reconciliations help you understand why this might happen.
Alternatively, if your records show a higher cash balance than your bank statement, you could overspend and eventually be charged overdraft fees or find that your checks bounce. This could affect your relationship with suppliers.
In rare occasions, you could find that a bank error has been made, provided no other explanation can be found in your records or the bank statement.
Therefore, it’s so important to maintain accurate bookkeeping records as any of the above could happen!
A bank reconciliation can help you identify numerous potential errors, but maintaining accurate books is an integral part of this process.
How do you reconcile your bank statement?
The first step involves deciding as to whether you want to complete these financial chores yourself.
If you do, it’s best that you complete a bank reconciliation using some form of cloud accounting software. Otherwise, you could use a professional bookkeeper, like one of ours here at Count, to complete these steps for you.
You should also decide how often you’re going to complete bank reconciliations, too. For a business dealing with a high volume of financial transactions, you should probably consider reconciling your statements with online banking references on a daily basis as this will help you keep track of a considerable amount of data in a more manageable chunk.
For every day you don’t reconcile you bank statements, it’s another day to reconcile when you do! So, getting ahead is good practice as it can help prevent a heavy workload in the future.
Once you’ve decided who’s going to do the bank reconciliation and how often, the natural first step is to take a look at the total cash balance of both the bank statement and your bookkeeper’s records; do the ending balances match up? If they don’t, it’s not the end of the world.
It’s quite common for these statements not to match up exactly. There could be small discrepancies here and there, which is why it’s so important to complete a bank reconciliation in the first place. You could be anticipating payments currently being processed or to pay bank service fees – acknowledging these smaller discrepancies helps you keep an eye on the bigger ones!
After checking your ending balances against one another, you need to go through both statements and investigate those reasons listed above – you need to know why your records don’t match. You can record this by adjusting the journal entries in the general ledger kept by yourself or your bookkeeper.
Alternatively, you could have a separate statement, a bank reconciliation statement, which is essentially the same method as adjusting the general ledger but is kept as a separate document.
This record should only detail why your books have changed. This is because, with most transactions, your bank statement will ‘catch up’ with your general ledger once certain transactions are processed.
Detailing changes to your general ledger are an acknowledgement of discrepancies that could, or should, be fixed by yourself. If, on the other hand, you notice that the discrepancy is not due to an issue with your books, you should contact your bank if you suspect fraud or a bank error.
A final word.
This process can be a painstakingly boring one at times. Checking cash transactions against one another, possibly every day, at a high volume, is enough to make anyone squirm! Hopefully, however, you can see how important completing a bank reconciliation is, how it can help you protect yourself against fraud and track your cash payments.
Remember, if you feel overwhelmed by the prospect of managing this yourself, take a look at Count’s professional bookkeeping services and see if we can save you from this headache!