As a business owner, you might wonder "why is it important to reconcile your bank statements?" Well, it will keep the finances of your company in order, and while it may not seem like a walk in the park, it can actually protect you from a variety of pitfalls.
But what exactly can you be protected from by reconciling your bank account statements? What are the advantages - and are there any challenges to that? You are about to find out.
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When you are doing bank reconciliation, you are comparing your bank statements to your company's financial records. By doing this, you can find potential discrepancies between your bank's records and your own records.
This way, you can be sure that no money "goes missing" from your accounts. And this is not limited to the major checking accounts, but to any credit cards or accounts for transactions that you may have (i.e., PayPal or a Bonsai account).
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Bank accounts should be reconciled on a monthly or quarterly basis. When doing this, you can verify that your individual or business transactions line up with what your bookkeeping says. There are two ways for you to do so:
When you're going for documentation reviews, you are comparing your monthly transactions with the ones connected to the corresponding account.
For instance, let's say that you have your credit card receipts that show you paid or received a certain sum, but your credit card bills tell a different story. As small as they may seem, these changes can significantly impact your bank account balance.
An analytics review can tell you whether your accounting records show any fraud or accounting errors. For instance, let's say that you make the same purchases every year, but this year the balance sheet showed that you went over the investment by a significant amount.
By comparing previous account activity levels and purchases, you may find out whether there were any issues or not. For instance, the bookkeeper may have added an extra zero at the end of the payment by mistake, which would explain the potential problem with the balance.
A bank reconciliation statement is important for every company that wants to keep its bank accounting in check. Monthly bank reconciliations can bring the following benefits:
While the bank reconciliation process may not be able to stop fraud from happening, it may at least tell you when it happens.
For instance, let's say that you paid a vendor, but they tampered with the amount and made it larger - cashing it afterward. You may not learn about it until you see it on your financial statements, comparing your receipts to how much money was pulled from your account.
Bank reconciliation statements can tell you exactly where your business is. For example, if your accounting records don't match your bank statement balance, you might end up paying more money than you actually have.
A bank reconciliation statement can help you catch any potential interest income or bank service fees that you were not aware of. This way, you will know that the bank balance of your company is in fact accurate.
As a business owner, it is important that you track the cash flow of your business. Through bank reconciliation, you can see how the money flows into your accounting records and joins your bank balance, helping you plan your payments and spend money efficiently.
While rare, banks can sometimes make mistakes. If there are discrepancies between your own records and the bank records, then bank reconciliation can prove very helpful. If you cannot seem to find an explanation for those errors, then it might be a good idea to talk to someone from the bank.
For your tax return to be accurate, your bank statement balance and your own balance must be accurate. Some banks such as Bonsai allow easy tax calculation, leading to more accurate tax reporting for your cash account balance.
That being said, bank reconciliations can help this task even more. If you use some type of tax software, bank reconciliation can reduce the chances of error. You should consider taking a look at your bank statement at least once every few months in order to ensure a correct tax return.
Bank reconciliation frequency will depend on the activity of your business. Here is how often you should have your cash balance checked in parallel with your bank account.
Every business should have bank reconciliation at least every month. This is the case if you get the same volume every day, in an average flow. If your business has seasonal flow, quarterly reconciliations may be enough to prevent any issues with your cash balance.
If you have a high-volume business, then you are at a higher risk of fraud. For this reason, you should consider reconciling your cash book balance every day. This way, you will make sure that the funds are moving in and out of the account at an adequate rate and that there aren't any discrepancies there.
If the business has a low activity volume, the monthly cash balance reconciliation is not necessary. That being said, if the bank account gets a low volume, then it should be closed and moved to a more active account. This can help streamline the reconciliation process.
When there are differences in your cash balance, with different amounts on the accounts, all of these differences must be explained somehow. By reconciling your bank account, you get to identify the issues and address them before they become an actual problem.
Businesses that do not reconcile their bank balance on a regular basis risk becoming a victim of fraud, bank errors, or unauthorized withdrawals. Left unaddressed, this can lead to leaks in the cash flow, which may eventually affect your business growth and overall operation.
Moreover, if a small business does not do periodic bank reconciliation, it is more likely to have its digital payments declined and its checks bounced. This can damage the relationships with the suppliers and the partners, resulting in strict payment terms and increased fees.
A business account doesn't feature the same kind of legal protection as a personal account. This means that while a small mistake such as a bank error may be easily corrected, things are not the same when it comes to fraudulent activity.
Companies are responsible for stopping this kind of fraudulent activity themselves. Bank reconciliation helps spot these problems so that they do not drag on for a longer time.
You will likely receive a bank statement from your financial institution of choice on a regular basis. Bonsai, for instance, allows monthly bank statements, but you may also find options to have it delivered on a quarterly basis.
Here is what you will have to do when the time for bank reconciliation turns a corner:
Collect all of your accounting records covering the periods of your bank statement. This can include anything from receipts to account withdrawals that you made during that time frame.
Compare all deposits and withdrawals that you make, and check whether they match the cashing and expenses of your account. Don't forget to calculate withdrawal fees or any other potential bank fees associated with your financial institution of choice.
It's normal to see timing differences every now and again, such as an outstanding check or a deposit that is still in transit. Perhaps your business has received a payment that has been in your business deposit, but the bank did not catch on to it yet.
This is why reconciling your bank statement with your own cash account balance is very important. This way, you may catch any potential fees that your bank may have deducted upon deposit.
Sometimes, your bank statement may show potential issues. The bank reconciliation process might help you catch them so that there are no discrepancies in your bank account. This may include the following issues:
Bank reconciliation can make these problems visible so that you may fix them, matching your bank balance with the data on your accounting system.
Now that you know where the problem is, you need to adjust the balances on your bank account. Add the deposits that were in transit, adjust errors and subtract any outstanding checks that appeared on your bank reconciliation statement.
When adjusting journal entries, you must add any potential penalties and bank fees and subtract the interest income that your bank recorded. Whether the mistake was made during your accounting process or the bank's, it needs to be addressed.
Now that you have your adjusted bank balance, it is time to compare your cash balances as well. At this point, everything should match your bank reconciliation process. If it still doesn't, then you will once more have to follow the previous steps, looking for a discrepancy.
Now that your bank reconciliation statement shows that everything is matching, it is time to make the final adjustments to your journal entries. You may include the following:
If the discrepancies were in your books instead, then this should be your cue to resolve any data entry errors.
Bank reconciliations are critical for small business owners and making sure that your financial statement matches your book balance is something that should be done on a regular basis.
That being said, there are still some challenges that you may go through sometimes, especially if you are reconciling your bank statement manually. Here are some of the most common:
During bank reconciliation, an analyst has to log into the bank account manually, pull the bank statement, and then make sure the amounts match perfectly with the data in your ERP system. They need to look at the cash transactions and other data entry errors that made it from your cash account.
If this reconciliation statement is done manually, it can lead to a slow data input as a result of the manual intervention. This may not be the case if you use a financial platform with some sort of automation system, such as Hello Bonsai.
If the bank reconciliation is done manually, then the possibility of human error also increases. If your purpose is an accurate ending balance, then this might not turn out to be to your advantage. You can make more mistakes than you are trying to fix.
A cash account such as Bonsai can help you speed up the process through automation. This can reduce the chances of human error and deliver more accuracy to your bank reconciliation.
With the bank reconciliation statement prepared, you must keep it stored for auditing purposes. If you do it online through systems such as Bonsai, it can be fairly easy. However, if it is done on paper, it can be quite tricky to maintain that paper trail for the two cash balances.
Account reconciliation is essential if you want to make sure that your bank statement shows no discrepancies. Talk to your bank, get a statement, and then compare your data to make sure that everything matches.
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