Bank Reconciliation – How to Do It and Why Is It Important?
A bank reconciliation represents a summary of banking activities that reconciles a business’s bank account with its financial records. This is a very useful tool that can help you spot any discrepancies and the reasons that caused them.
Here are instructions on how to do a bank reconciliation and why is it important for your business’s financial health.
Steps You Need to Take in a Bank Reconciliation Process
Typically, at the end of each month, you receive a bank statement. Furthermore, this statement presents an overview of the cash and other deposits made into your business account. It also includes charges from the bank. For example, account services fees and transfer fees.
So, you got your bank statement, and now what? Well, here is the list of steps to reconcile a bank statement:
1. Compare the Statement With Your General Business Ledger
The first step is to compare your books with the statement. Make sure that all the deposits and transactions match and mark the ones that do. But, here’s the catch. There will be some differences between these two. As we mentioned above, bank charges will also be included in your statement. However, they won’t be in your financial records. You will need to reconcile those by doing this next step.
2. Adjust the Balance
There are two ways to adjust your balances. Either by bank statement or by your general ledger.
If you choose the first way – here’s what you need to pay attention to. For start, deposits in transit. They are transactions that take time to process. So, you’ll need to add those to your bank statement. This happens if your customer pays with checks or if it’s some big transaction. You will have these payments recorded in your books but they won’t be visible in your bank statement due to fact that they haven’t been processed yet.
One other thing to do is to deduct outstanding checks. Issued checks may be in your cash account, but only because the bank hasn’t cleared them so far. Especially, if you issued checks on the last days of the month.
When you choose to adjust the balance by your general ledger, make sure you include bank charges from your statement. As those won’t be in your books.
After adjusting your records, the amounts on your statement and general ledger should match. If they don’t, you will need to repeat the whole process.
Why Bank Reconciliation is Important?
As we mentioned above, bank reconciliation is a powerful tool in preventing fraud at your company. After you do it, you will be able to notice any discrepancies in your books and how they got there. This tool can help you detect errors easily – errors like typos, missed payments, double payments, calculation errors, etc.
Now, some good news – accounting software for bank reconciliation exists and works error-free! Although, if you are a person who believes more in humans over machines – hiring a professional can simplify this process.
Tips for the End
No one can tell you how often to do your bank reconciliation. This depends on you. Ideally, you should do it whenever you receive a bank statement. But, some business owners do it daily, and some choose to do it quarterly.
If you are still unsure of how these things work or have any questions, contact us today and let us help you!