What to Know About Bank Reconciliation
From small start-ups to established corporations, all companies need their own set of books to record their financial transactions. At the same time, companies also maintain business bank accounts, and those banks issue regular statements recording all of the debits and credits to the account.
In an ideal world, a company’s bank account statement would always match its internal books. If you use cash-based accounting, this should in fact be the case, since you record each transaction at the same time as the bank. But for those who use accrual accounting, there will likely be some discrepancies, whether that’s due to bank fees, delayed money transfers, or bounced checks.
This is where bank reconciliation comes into play. When you “reconcile” your books with your bank account, you compare these two ledgers for the purpose of uncovering any discrepancies. The reconciliation process helps you not only to ensure that the balances match and your books are accurate, but to detect if there are larger issues at hand such as fraud or missed payments.
If you do bookkeeping on your own, it’s imperative that you set a regular schedule for reconciliation, whether that’s daily (for businesses with a lot of daily transactions), weekly, or monthly (for smaller outfits). Outsourcing to a bookkeeper, such as Boxelder’s team of experienced professionals, will allow you to rest easy, knowing that your books are routinely in order.
How To Reconcile a Bank Statement
So what does the reconciliation process actually look like? It’s truly as easy as 1, 2, 3! Follow these easy steps to complete a bank reconciliation.
Compare your accounts:
When you compare your books and your bank account you’re only looking for three things:
- What are the account balances at the end of the specified time period?
- Which line statements in your books are not included in your bank statement?
- Which line statements in your bank statement are not included in your books?
Now that you have that information, you’re ready to adjust your balances and see how much money you actually have.
To adjust each account balance, you need to add the outstanding deposits and deduct the outstanding withdrawals. For your bank account, these are the items recorded in your books but not yet processed by the bank (e.g., a check that hasn’t cleared yet). For your books, these are the line items that have been posted to your bank account but not yet recorded in your ledger (e.g., service charges or bank fees).
After making these adjustments, the two balances should match. The reconciliation is complete — all you have to do now is record it.
Record the Reconciliation
Your bank account will eventually reach the actual balance once all of the outstanding transactions have processed. However, you need to manually record the reconciliation in your own books in order to get them up to date.
You can do this either by quickly adding the outstanding deposits and subtracting the outstanding withdrawals at the bottom of your ledger, or by preparing an in-depth bank reconciliation statement that includes all of the adjusted transactions.
Benefits of Bank Reconciliation
Bank reconciliation carries many benefits to companies. If you reconcile your books on a regular basis, here are just a few of the ways that work and organization will pay off:
Discovering Financial Reality
When you reconcile your bank statement with your internal bookkeeping, you will determine the “true” financial condition of your business. In many cases, you may have less money available than you think you have; reconciling your accounts will help you catch these problems before they spiral out of control.
Uncovering Bank Errors
Banks may be too big to fail, but they do make mistakes from time to time. When you reconcile your bank statement with your books, you will have an opportunity to see the accuracy of your bank’s records. There is always a possibility that the bank has made errors in its recordkeeping, or has even charged you fees by mistake. Reconciling your accounts is therefore a very useful way to determine the soundness of your bank’s practices.
Catching Incidents of Fraud
When you reconcile your accounts, you may also uncover incidents of fraud. For instance, if you work with partners, you may uncover that one partner has taken more than what was recorded on your books. Or, you may determine that one of your vendors tampered with a check to extract more funds than what was actually owed. Detecting fraud is another very useful function of bank reconciliation.
Professional Bookkeepers, On Your Team
When you break it down, bank reconciliation isn’t too complicated — but that doesn’t mean it’s not tedious. As your business grows, you might find that tending to your books in-house is eating up too much of your time. When you reach that point, we’ll be here to help.
Our expert bookkeepers boast decades of experience and have earned QuickBooks ProAdvisor certifications. Let our team handle your reconciliation and you can be confident that your books will stay healthy. Reach out today for more information.