When it comes to financial success, there are few things more important than bank reconciliations. This crucial process ensures that all transactions are accurately recorded and any discrepancies are identified, ultimately leading to better decision-making and improved performance.
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Understanding Bank Reconciliation
At its core, a bank reconciliation is the process of comparing what has gone through your operating account or savings account with what is on your balance sheet. Ideally, these two numbers should match, but they never will. The purpose of a bank reconciliation is to ensure that you’ve captured all of your sales and expenses for the month.
That’s why reconciliations are important; they help you make sure that your financials are correct every month. By comparing what has gone through your operating account with what is on your balance sheet, you can identify any discrepancies and make sure that you haven’t missed anything. For example, a bank reconciliation can help you identify outstanding checks, ensure that your deposits are correct, and make sure that you have included all bank fees.
The Importance of Bank Reconciliation
Why It Matters
Reconciliations ensure that you aren’t missing any expenses, that there are no outstanding deposits or missing checks, and that you haven’t made any entry errors in your accounting and bookkeeping records. That’s why it’s important to reconcile all of your bank accounts.
Reconcile your accounts on a monthly basis. Every account, whether it is an operating checking account or a savings account, should be reconciled every month. Even those accounts that may be very small and may only have a few transactions going through periodically.
Reconcile monthly to make sure that you’re not missing any expenses and that your balance sheet is correct. The more frequently you do them, the easier it is to maintain them. A good way to start is to make sure the cash balance is correct and agrees with your bank balance. If you can do this weekly – checking your cash balance against your bank balance – that will make your month-end process a lot easier.
A bank reconciliation can uncover various types of differences. For example, it can help you identify outstanding checks, ensure that your deposits are correct, and make sure that you have included all bank service fees. It can also help you identify when somebody short pays you and when you are missing expenses.
Small business owners should also be aware of the potential for fraud and mistakes (whether those are bank errors or internal errors) in their financial transactions. Regular bank reconciliations can help identify any discrepancies or unusual transactions that may indicate fraudulent activity or errors in financial records.
The Reconciliation Process
What You Need
To perform a bank reconciliation, you will need several pieces of information and documents. These include:
- Bank statements: You will need to obtain a bank statement for the period you want to reconcile. This statement will list all of the deposits, withdrawals, fees, and other transactions that occurred during the period.
- Accounting records: You will need access to your accounting records, which should list all of the transactions that you have recorded for the same period.
- Outstanding checks and deposits: You will need a list of any outstanding checks or deposits that have not yet cleared the bank.
- Bank fees: You will need to take into account any bank fees that were charged to your account during the period.
Depending on your business and the complexity of your financial records, you may need other information, such as a record of electronic transfers or credit card payments.
What to Do
The bank reconciliation process is fairly simple: you’ll need to compare the transactions recorded in your internal accounting records with those in your monthly bank statement.
Compare the deposits and withdrawals on your bank statement with the transactions in your accounting records. Mark off the transactions that appear on both your bank statement and your accounting records.
Next, check to see if there are any outstanding checks or deposits that have not yet cleared the bank. These should be recorded on a separate list. Make any necessary adjustments to your accounting records to ensure that they match the bank statement.
Once you have matched all transactions and made any necessary adjustments, calculate the ending balance on your bank statement and compare it to the ending balance in your accounting records. If the two balances match, your bank reconciliation is complete. However, if they do not match, you will need to review your records and bank statements to identify any discrepancies and correct them.
Common Mistakes in Bank Reconciliation
Neglecting bank reconciliation.
Many businesses view bank reconciliation as a tedious task that can be put off until later. However, neglecting bank reconciliation can lead to a backlog of unreconciled accounts that pile up and become overwhelming. The best approach is to make it a habit to reconcile monthly. By doing so, you can ensure that your financials are correct every month, and identify any discrepancies between your different accounts.
Not including all relevant transactions.
One of the most common mistakes small business owners make when doing bank reconciliation is not including all relevant transactions. This can result in inaccurate financial reporting and throw off your balances. It’s important to include all outstanding checks, deposits, bank fees, and any other bank transactions that may have occurred since your last reconciliation. Omitting even one transaction can have significant consequences.
Failing to prioritize bank reconciliation during busy seasons.
Finally, it’s important to prioritize bank reconciliations during busy seasons that may require extra attention to your accounting processes. By doing so, you can ensure accuracy and maintain control over your financial records. In conclusion, by following these best practices, you can ensure that your bank reconciliations are accurate and effective in helping you manage your small business finances.
The Role of Bank Reconciliation in the Age of Online Banking
Despite everything being available electronically, bank reconciliations are still necessary in the age of online banking. There is still human intervention and intelligence that needs to happen. For instance, even accounting software like QuickBooks has its own AI, but it doesn’t place every expense where it should go. Sometimes it comes in as a weird transaction. A bank reconciliation can help you ensure that everything is recorded correctly.
Key Takeaways for Small Business Owners
- Bank reconciliations are a critical aspect of your financial success.
- They help ensure that your business finances are correct every month and that you haven’t missed anything.
- Reconciling all of your bank accounts every month can identify any discrepancies and ensure that your balance sheet is correct.
- To ensure your business is successful, make sure to do your reconciliations correctly and frequently.
Why Work With Margin Authority
At Margin Authority, we focus on helping business owners manage their company’s financials for faster, more profitable, and more efficient business decisions. If you’re looking to make any strategic decisions or operational changes to your business, let us help. It’s what we do. Reach out to begin your journey to financial health today.