Chances are, you’ve never heard of or had any reason to pay much attention to what bank reconciliation is, much less wondered how to do it. However, many new business owners and entrepreneurs have had to learn about it quickly.
The bank reconciliation is a critical part of managing a business’ accounts. The bank statement is considered the source of the majority of your day-to-day transactions, both in and out!.
The Basics of Bank Reconciliation
Put plainly, bank reconciliation is a way for business owners or bookkeepers to double-check if the company’s financial records are accurate and updated. It’s done by comparing one’s business accounts against the corresponding bank statements and checking if the numbers line up. Any discrepancies between the two accounts must be resolved as soon as possible.
What do you get out of a bank reconciliation?
Verify the accuracy of your data. Conducting regular reviews of your books helps you find and clean up any errors made when the financial data was inputted.
Visibility on any payment irregularities. As bookkeeping could be susceptible to human error, it’s always a good idea to check if you’ve made any erroneous payments. Also, any irregularities you note might be a sign that someone is trying to defraud your business.
Accurate assessment of the business’ state. Never just go with your gut when determining the financial position of your company. Hard-data and regularly verified figures are your friends if you want to stay on top of your business’ performance.
Find opportunities for tax breaks. Tax breaks are little pockets of grace that savvy business owners know to grab whenever they can, like the concessions made by the government of Australia this year. You can save even more time by identifying which expenses are tax-deductible when you do your bank reconciliation.
Be prepared for tax season. Part of the process of filing your tax returns involves having a fully reconciled record of business income and expenditure. Personally or, better yet, getting tax services for small businesses to keep up with your bank reconciliations means that you don’t have to rush it come tax season.
Track and report on your business’ profitability. Like the way you can classify tax-deductible expenditures as you go along your bank reconciliation, you can assign expenses to jobs to see how much you earned. Doing so will make it easier to track finances and report on them.
Preparing a Bank Reconciliation Statement
You’ll typically receive your bank statement at the end of the month. On it, you’ll find an itemised list of every deposit made into your business’ checking account, along with other bank charges. Reconcile the entries on this document with what’s in your ledgers.
It’s worth noting that most cloud-based accounting systems now connect and pull transaction data directly from your bank, along with providing guidance and suggestions for the allocation of receipts and payments. To the trained bookkeeper this is a huge time saver, but to the inexperienced, it is a minefield of errors waiting to happen.
Compare deposit entries. Once you have your most recent bank statement, match the deposits to the ones you have on record. The deposit on the debit side of your business’ cashbook should align with the bank statement’s credit entry while the entry on the credit column of the bank column should match with the corresponding bank statement entry on the debit side.
Address any errors in the bank statements. After noting the entries, adjust the balance on your statement to the correct one. To accomplish this, you will have to take three things into account:
- Deposits in transit – checks and other non-cash payments that the business received and entered into its books but have yet to be processed by the bank. Add it to the bank statement.
- Outstanding checks – you’ll often see these with checks that were issued near the end of the month. While the business has written it in and recorded it in its cash amount, the check itself has not yet cleared with the bank. Deduct these from the bank balance.
- Bank errors – mistakes, including incorrect or omitted amounts, that occur during the creation of the bank statement and cause discrepancies between the figures on your general ledger and the bank statement you were issued.
Adjust the cash account. Make sure to adjust the cash balances in the business account. You can do this either by adding interest or deducting monthly charges and overdraft fees on the record.
Practicing financial discipline and maintaining ledger integrity are core components of a successful business, so keep up with the records of your company’s financial transactions.
You don’t need to figure it out on your own, though.
There are already systems in place that you could utilise and trusted teams you could outsource your needs to, like Your Finance Department.
Speak with our representative today to learn more.
