A Complete Handy Guide For Bank Reconciliations

A Complete Handy Guide For Bank Reconciliations

A COMPLETE HANDY GUIDE FOR BANK RECONCILIATIONS 

Bank Reconciliations aren't fun, but they shield you from a variety of pitfalls, such as overdrawing your account and being a victim of fraud, if you do them regularly.

BANK RECONCILIATIONS

A bank reconciliation statement aligns an entity's bank account with its financial statements by summarising banking, net banking, and business operations. Payments have been collected, and cash collections have been deposited into a bank account, according to bank reconciliation statements.

You "reconcile" your bank statement by comparing it to your bookkeeping records for the same period and identifying any discrepancies. Then you keep track of the differences so that you or your accountant can be sure no money has gone "missing" from your business.

WHO IS INCHARGE FOR THE BANK RECONCILIATIONS?

If you do your bookkeeping, you should plan on reconciling your bank statements regularly (more on that below). If you hire a bookkeeper or use an online bookkeeping service on e-banking, they'll take care of it.

If you use the accrual form of accounting, you just need to reconcile bank statements. If you use cash basis accounting, on the other hand, you report every transaction at the same time the bank does, ensuring that the books and bank statements are in sync.

There's always someone checking to make sure every number adds up and the books fit really in large corporations of full-time accountants. This is normally the owner's duty in a small business.

5 IMPORTANT REASONS WHY BANK RECONCILIATIONS HIGHLY MATTER

Bank reconciliations are time-consuming, but financial hygiene will pay off in the long run. Here's why doing them is such a good idea.

  • ACCEPT YOUR BUSINESS AS IT IS

You want to know that your books are accurate when you look at them. If your bank account and books don't fit, you could end up spending money you don't have—or holding on to cash you should be investing in your business.

  • TRACK CASH FLOW 

Managing cash flow is an important aspect of running a company. You can see the connection between when money enters your business and when it enters your bank account by reconciling your bank statements, and schedule how you raise and spend money accordingly.

  • DETECT FRAUD

Reconciling your bank statements will not prevent fraud, but it will alert you to the fact that it has occurred. You might, for example, pay a vendor by check, but they could tamper with it and increase the amount withdrawn before cashing it. When you reconcile your bank account, the difference will turn up.

Alternatively, you and your business partner may have a joint account. They can take more than they report on the books when they withdraw money from your account to pay for a business expense. When you reconcile your bank statement, you'll note this.

Hopefully, you'll never have to worry about fraud, but reconciling your bank statements is one way to ensure that it doesn't arise.

  • DETECT BANK ERRORS 

It's rare, but the bank will sometimes make a mistake. If you can't understand a difference in your accounts any other way, it's time to talk to someone at the bank.

  • MARK AND IDENTIFY YOUR ACCOUNT RECEIVABLES

When you finish a project and the client says, "The cheque is going in the mail today, I promise!" you can "debit" your cash account if you use the accrual method of accounting. And, a month later, you do your bank reconciliation and discover that the cheque never arrived, and the money isn't in your accounts(Even though your accounting indicates you were paid)

Bank reconciliations act as a safety net to ensure that your receivables never spiral out of reach. And if you see a consistent difference in accounts receivable between your books and your bank, you realize you have a more serious problem to address.

The above-stated 5 indications are as much as important in bookkeeping. 

Now, we’ll jump out to know how to perform the bank reconciliation process.

HOW TO CONDUCT BANK RECONCILIATION PROCESS?

When you do bank reconciliation, the first step is to identify the transactions that are causing your books and bank account to be out of sync. This allows you to line up the balances. Then you document what you did to reconcile the accounts.

We'll go through each phase of the bank reconciliation process in greater depth later, but first, make sure your books are current. For the bank reconciliation to succeed, they must be present. Use our catch-up bookkeeping guide to get back on track if you've fallen behind on your bookkeeping (or hire us to do your catch-up bookkeeping for you).

CHECK YOUR CASH BALANCES

You have two cash balances to check: the cash on your bank statements and the cash in your bookkeeping records' "cash account" portion. 

You're specifically trying to see if the "ending balance" of these two accounts for a given period is the same (say, for the month of December).

Even if you keep careful books, the balance reported in your books (again, the cash account) and the balance in your current account will rarely ever be the same. 

One explanation for this is that your bank may impose service fees or bank fees for excessive withdrawals even in online banking. Alternatively, when moving money from one account to another, there can be a wait. Alternatively, you should have written an NSF check (not sufficient funds) and reported the sum in your books normally, without realizing the check bounced because there was no insufficient balance.

We’ll help you with the 2 important aspects,

OUTSTANDING CHECK/WITHDRAWAL: This is a check or money transfer that you've submitted and registered in your books but the bank hasn't processed yet.

OUTSTANDING RECEIPT/ DEPOSIT: This is money that your business has collected and reported on its books but that has not yet been processed by the bank.

Outstanding checks/withdrawals, as well as outstanding deposits/receipts, aren't risky if you keep track of them.

HOW TO RECORD BANK RECONCILIATIONS?

After you've found out why your bank statement and accounting reports don't fit, you'll need to keep track of them. There are two options for accomplishing this.

OPTION 1 - JOURNAL ENTRIES ADJUSTMENT: All of your transactions are documented in journal entries (sometimes called debits and credits). The general ledger contains all of your journal entries. This is most likely an Excel sheet or a handwritten paper if you aren't using accounting software.

OPTION 2 - STATEMENT OF BANK RECONCILIATION: This paper includes the same details as an adjusting journal entry, but it is saved separately.

Personal choice and need will determine which form you use. Consider when or when you may need to review your financial records for bank reconciliation, and which form of tracking would make the process simpler for you depending on how you hold your records.

HOW OFTEN DO YOUR RECONCILE BANK STATEMENTS?

The frequency at which you reconcile bank statements is largely determined by the number of transactions you make. 

Some companies can reconcile their accounts regularly if money enters and exits their accounts several times per day.

Here, we would like to cite bank reconciliation examples. A restaurant or a busy retail store, both process a large number of transactions and can reconcile regularly. A small online shop, on the other hand, with days when no new purchases are made, might reconcile on a weekly or monthly basis.

It's important to stay current. The more often you compare your bank statements, the less difficult it becomes each time.

If you haven't reconciled your bank statements in six months, for example, you'll need to review six months' worth of line items. The number of transactions and the level of patience will determine whether or not this is a wise decision.

It's best to stick to a routine. Have a plan for how much you'll reconcile, and stick to it. This will prevent your unreconciled bank statements from being an overwhelming and time-consuming process. It will also keep you in touch with your company's cash flow.

FINAL WORDS: 

Reconciling bank statements will bring a sense of peace and balance to some business owners. For others, it adds to the burden of doing their bookkeeping. If you fall into the above group, it might be time to consider hiring a bookkeeper to help you reconcile your accounts.

Open a bank account online, check if your financial information is correct and your accounting documents match the bank records when it comes to the amount of cash in your accounts, you've completed the process successfully and can relax.

However, keep in mind that the day you close your books is unlikely to be the same day the bank sends out its statements, so try to balance the accounts internally.

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