And why it’s so important
If you ever wonder, not reconciling your business account is the #1 mistake I see for small businesses that manage their own book.
Accordingly to AccountingTools.com: “A bank reconciliation is the process of matching the balances in an entity’s accounting records for a cash account to the corresponding information on a bank statement.”
In plain English, it’s just checking if the information on your accounting system matches the bank or credit card statement.
While very simplistic, performing bank reconciliation on a regular basis helps you identify:
- Duplicate transactions
- Missing transactions
- Transactions errors – such as typos
- Fraudulent charges (especially for credit card)
My recommendation is to reconcile your accounts on a monthly basis. If you use an automated accounting system – such as Quickbooks Online or Xero – you have a reconcile feature embedded in it. If you’re on spreadsheet mode, please check our Shop, our DIY Bookkeeping Sheet allows for Reconciliation. You’ll need:
- Your current Bank Statement – printed out or as a pdf
- Your accounting system open
The steps you’ll need to follow:
- Check the period you’re reconciling the account
- Check the beginning balance
- Check deposits made for the period – ensure information match (date, amount, check # – if applicable)
- Check payments made for the period – ensure information match (date, amount, vendor, check # – if applicable)
- Check for bank fees, interest earned, etc.
If all looks good, you can finish the reconciliation and move to the next account. A few common discrepancies can be:
- Incorrect Beginning Balance: This can be caused by deleting or changing a transaction that was already reconciled. Remedy: Look into the previous reconciliation report, check trail audit for any removed transactions.
- Uncleared Check: If you’re old school, you might be mailing checks to pay for invoices and bills. It’s common to take a week or so for the check to clear – the vendor to receive the check and deposit into their bank account.
- Payment processed not on the statement: It can take up to 3 business days for a transaction to reflect on your bank account. If you processed a payment on the last day of the month, it might only be cleared on the following month.
For those who know me, my motto is: the best system is the one you use. Add reconciling accounts to your system to ensure your financial data is accurate, or partner with a bookkeeping professional to have this all done for you.