Bank reconciliation is the process of comparing the records of your company’s ledger to those of your bank. This process helps to determine whether there are any differences between the two financial statements. The closing balance on your company ledger is called the book balance while that of the bank is called the bank balance. It is not unusual to come across a couple of differences between the book balance and bank balance.
However, it’s crucial that you analyze these differences thoroughly and find their root cause. If you turn a blind eye to these variations, there will be significant differences between the amount you think your firm has and the amount the bank claims to have in your account. In the worst cases, you could end up with an overdrawn account, bounced checks, and overdraft expenses.
How does Bank Reconciliation Work?
Bank reconciliation accounting is not a complex process. At the core, it merely requires you to cross-check the internal records of transactions against your monthly bank statement.
It’s vital that you examine each transaction separately while verifying that the amounts match perfectly. If you come across any differences, note them down to investigate later.
How to Reconcile Your Bank Account
Balancing your company ledgers is a very tedious task and one where an untrained eye is bound to make errors, and those errors might grow in time if they are not addressed. This is why all companies would prosper from finding a good freelancer bookkeeper that will do this job instead of them, providing both professional assistance and a shield from liability for any errors or miscalculations.
If you are reconciling your accounts by yourself, you are the person liable for any mistakes that are made, but if that is done by an outside professional, they are taking all the responsibility on themselves.
Thankfully, you will be able to find a lot of professional bookkeepers online, thus selecting one that is a perfect fit for your company should be easy. When asking for a quote online, you will be provided with several options and can then select a person that not only has the right education and licenses that you need, but is also well versed in the exact type of accounting that you need at that moment.
It is always better to have an outside person correct your accounts, as they will always have experience with the newest laws and regulations, which is not necessarily the case with ‘’in-house’’ accountants.
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What are the causes of the discrepancies between your bank statement and general ledger?
One common reason is making math errors. Humans are prone to making mistakes so it could be that you made a mistake when recording a transaction in your books. These mistakes can be as simple as transposing two figures or more severe issues like omitting a sale.
Another likely cause for the discrepancy could be an outstanding check. You might have a check that did not get cleared until after the date your closing statement is prepared. Suppose you’ve paid one of your suppliers $105 at the beginning of the month. But for some reason, the vendor fails to cash the check by the end of the month. In your ledger, you'll have a record of the debit amount, but this will not be reflected in your bank statement.
Ideally, the closing balance in your bank statement should correspond to the one in your company ledger. If not, you should be in a position to explain the reason for the resulting variations.
You can make your bank reconciliation process as formal or informal as you like. A majority of business owners choose to create bank reconciliation statements to document transactions on a regular basis. Depending on the nature of your business, you can decide to perform bank reconciliation on a daily, quarterly, monthly, or annual basis.
To make this process easier, ensure that the accounting system or software that you use displays records for every transaction. You can also keep track of this data using a manual register.
If you already know how to balance a checkbook, then balancing your bank statement and book balance is not that different.
Importance of Bank Reconciliation
As mentioned earlier, it’s vital that you perform a bank reconciliation process frequently. It will help to identify issues in their budding stage. If there are errors, it’s unlikely that the bank will be willing to cover these mistakes. So, the sooner you can recognize these errors, the sooner you can take corrective action, and prevent your firm from incurring losses.
Here are other reasons why a bank reconciliation process is important:
Prevent Administrative Issues
Reconciling your accounts makes it easy to pinpoint those administrative or company management issues that require immediate attention. Based on your financial records, you might see a need to change your credit policy or the way you handle accounts receivables. If you have a system for tracking your transactions consistently, then you won’t have a problem with:
- Determining the total amount of money available in all your accounts
- Encountering bounced checks or unsuccessful electronic payments to suppliers and creditors
- Establishing whether your clients’ invoices have gone through or failed
- Keeping tabs on outstanding checks
- Ensuring that every transaction has been recorded in your accounting system
The whole idea behind a bank reconciliation process is to verify that your company’s disbursed checks correspond to the cleared checks in your bank statement. With such a careful review of your finances, you’ll be able to detect any fraudulent activity. This could range from making a payment to unauthorized parties to paying for illicit business activities. Similarly, if any of your employees have attempted to amend a check or other financial record, the bank reconciliation process will reveal this.
Keep track of Transaction Status
Just because you sent a check to your creditor or supplier does not necessarily mean that he cashed it. Only through a bank reconciliation process can reveal that a check that you wrote five months ago is yet to be cashed. An uncashed check will have you thinking that you have a certain amount of money in your account when you don’t. Once you’ve identified these uncashed checks, you can call the individual responsible and urge them to cash the check.
Pay Bills on Time
With some businesses, transactions are structured in such a way that money is automatically deducted from your account at the end of every month. If you have such operations, reconciling accounts will help you to keep tabs on all your bills. This way, you’ll never have to worry about missing a payment or having a bank overdraft.
Save Yourself Money
Reconciling your accounts on a regular basis saves you a ton of money in the long run. By reviewing your statements, you can spot bank charges or other hidden fees of which you were not aware. If you’ve been incurring costs that you didn’t know about, you can consult all the stakeholders involved including the bank.
To sum up, bank reconciling is a comparison between the financial records in your ledger with those in your bank statement. Reconciling these two accounts is a good business practice, as it not only helps you to track your transactions but also to make timely repayments and prevent fraud. To ensure that all of these accounts are in order, as well as that you are not liable for any errors that might have occurred, it is best to hire a seasoned professional that will help fix all of your accounts. Hireling a freelancer bookkeeper can save you a lot of trouble with your books, for a very reasonable fee.