Do you have a dedicated bank account for your business? If not, you’ll quickly find that compiling your reconciliation statement has become an arduous task.
In an age where we can check every transaction from the palm of our hand, you may feel that the bank reconciliation process is no longer essential. However, small company owners and bookkeepers should remember that banks can make mistakes, and learning how to reconcile a bank statement is one of the greatest methods to identify such problems.
While most accounting software systems do have bank connectivity, which may significantly speed up the bank reconciliation steps, pairing the system to your financial institution does not eliminate the need for month-end bank reconciliation.
To ensure your books are above-board, today we'll explain how to do bank reconciliation and provide step-by-step directions on how to perform one.
Reconciling bank statements entails balancing the accounts on your bank statement with the appropriate entries in your financial records.
Bank reconciliations should be performed monthly by all firms, at a minimum. Because banks issue statements at the end of each month that may be used as a foundation for the reconciliation, it’s preferable to reconcile the books promptly after they’re received.
Companies that have not learned how to do bank reconciliation monthly are vulnerable to fraud, illegal withdrawals, and bank mistakes. These concerns, if left unaddressed, can result in cash flow breaches, which can hinder corporate operations and development.
Furthermore, a firm is more likely to bounce outstanding checks. Bank reconciliation can also help them avoid issues surrounding electronic payments if the process is not performed regularly. Failure to pay can ruin relationships with suppliers and partners, leading to higher costs and harsher payment conditions.
Keep in mind, business accounts typically do not have the same legal safeguards as consumer accounts. While they may correct basic issues like bank errors, banks usually do not cover fraudulent activity. Instead, businesses are responsible for detecting and preventing fraudulent use. Routine checks on the account balance and investigations into any transactions that do not reconcile correctly are required for this type of policing.
Similar to how you should perform a bank reconciliation, you should endeavor to perform a cash reconciliation, where you compare your cash balance and cash receipts.
By learning how to reconcile accounts, you can reap several benefits, including:
By understanding how to do bank reconciliation, you can maintain books in good standing more efficiently and effectively.
Here are the steps for how to prepare a bank reconciliation:
The first of the bank reconciliation steps is to get your financial records together. Your bank must provide you with a list of transactions. You’ll want to ensure that you have a statement for every form of account associated with the business. These can be as simple as collecting your credit card statement and your monthly statement.
With the aid of data capture technologies, certain accounting software will automatically bring in invoices and receipts and extract the data. You might do this in a logbook, a spreadsheet, or some form of specialized accounting software.
Start the bank reconciliation process from the last time the balance in your business books and your bank account matched.
Ensure that each deposit is recorded as income in your accounts and fill in the blanks if something is missing. You must determine if the transaction was a sale, interest, a refund, or anything else.
Each item should correspond to a bank deposit on your account statement. Find out why anything is missing.
You should keep track of all bank withdrawals in your books. The list includes expenses such as bank fees, which you may not have considered yet.
Each entry should correspond to a withdrawal from your bank account. If this isn't the case, figure out why. It's possible that one of your payments hasn't cleared yet, or that you paid with cash or a separate account.
Your company bank balance should match the totals in your business accounts after you've reviewed all the deposits and withdrawals. This ending balance is where you'll begin your subsequent reconciliation.
Learning how to do bank reconciliation doesn’t have to be a headache. While some accounting software can greatly speed up the reconciliation process, it doesn’t eliminate the need for a month-end bank reconciliation.
Thankfully, you can turn to Porte Brown. We’re a full-service accounting and consulting business that's ready to help you with your bank reconciliation. Call us today, and we can show you how to get to the next level.
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