Everything You Need to Know About Bank Reconciliations

Everything You Need to Know About Bank Reconciliations

Bookkeepers love the term reconcile, and yet it brings about fear in the minds of business owners. Reconcile means to settle a dispute, make things compatible or consistent, to coexist in harmony. Don’t you just love it when your books coexist in harmony? Everything balances out, and the world is right again.

But, to the SMB owner, it conjures images of long hours sitting at the desk pouring through bank statements only to result in an imbalance. Let’s look at bank reconciliation, how it works, why it is essential, and how to reconcile your statements properly.

What is a bank reconciliation?

Bank reconciliations are critical to maintaining a financially healthy business. Reconciling your bank account ensures that you identify unusual transactions caused by accounting mistakes or fraud.

This process should be performed at least once per month for each active bank and credit card account. The reconciliation process matches your financial records with those in the bank statement. For any transactions that do not match, the business needs to locate the discrepancy and book it to an appropriate revenue, expense, or balance sheet account. By performing a bank reconciliation, the company knows they have an accurate recording of their cash position – something every business owner needs to know.

Why Bank Reconciliations Matter for Your Business.

Whether you have a bookkeeper or utilize an online bookkeeping service, all business owners should be comfortable in performing and understanding a ‘bank rec.” through the process of the reconciliation, the owner can:

  • track cash flow
  • detect fraud
  • closely monitor receivables
  • find discrepancies between your books and bank account

Do I need to perform bank reconciliations, and how often?

Yes, you must perform a bank reconciliation at least once a month. Depending on your business’s size and the number of transactions, bank reconciliations may be performed weekly or even daily. Remember-cash balance is critical to a healthy business. Understanding your cash position empowers you as a business owner to make the best decisions for your business.

Therefore, it is critical to reconcile transactions for cash in your books and your bank account. They must match. This exercise identifies transactions that are booked improperly and can alert the owner to fraud and accounting errors. Bank reconciliations must be performed before publishing your income statement and balance sheet to ensure the financial statements’ accuracy.

What if the bank reconciliation doesn’t balance?

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What if the bank reconciliation doesn’t balance?

Don’t worry. There are good reasons why accounts don’t reconcile. For example, if payment is booked on November 30th and deposited on December 1st, the money was recorded in one month and deposited in the other. It will show as an open transaction that can’t be cleared until the following month.

Let’s talk about Venmo or other ways to withdraw cash from your business account. You or an employee may pay money to a vendor using Venmo. When you reconcile, you will see a withdraw or payment and no bill to match it to. The money was removed with no entry or reason in the books. The bank reconciliation will identify this and, in some cases, can alert the owner to fraud if the reason for the Venmo payment is not legitimate.

Bank reconciliations can alert the business owner to fraud.

The first thing a business owner should establish is a separation between the person(s) who approves a bill and the person(s) who pays bills, and the person who performs the bank reconciliation. These tasks are sometimes given to one person, who is often not the owner. The owner may feel like they are streamlining the process but fail to see the long-term exposure to fraud. When reviewing your bill payment process, you may find it’s a lot easier than you think to create proper controls.

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  • First, separate the bill approval process from the bill payment process. You may even want to do it all yourself (I know, you don’t have time… we’ll get to that next!). When you separate these functions, ensure that the person reviewing the bills cannot access any bank records.
  • The same goes for the person paying the bills. Once you’ve established the proper process, use an automated bill payment solution to ensure you can audit each transaction and separate duties electronically. These systems are inexpensive and are incredibly efficient, but the process you create needs to be determined before implementing any technology.
  • Last, consult your CPA. While you may not know it, CPA’s have a lot more to offer than merely providing tax and audit services.

What are the 5 steps to perform a bank reconciliation?

Compare your bank statement to your books

This step is as simple as it sounds. Many computer systems import a record of banking transactions from your bank and credit card vendors to make the comparison electronically. You will first want to check your starting balance to make sure your books match the bank. If they don’t match, a transaction(s) may have been entered in a previous period that has adjusted your beginning balance in your books. This is rare, but it can happen. Next, check you to see if the account reconciles. If it does, your all set!

It’s fairly typical to have transactions that need to be reconciled. There are several reasons for this. It’s typical in small businesses to have off book transactions (a payment that isn’t recorded or a transaction that was recorded in a prior period). Any transactions that are not matched between the books and the bank must then be reviewed before creating a reconciling entry.

Verify Discrepancies

When discrepancies are found, it is critical to verify why the discrepancy exists. This is why having proper controls in place is required to ensure that fraud can not be committed through the bank reconciliation process. The easiest way for someone to commit fraud is to have control over more than one financial process. It creates an opportunity for them to create fraudulent transactions, then cover them up in the reconciliation process. Once transactions have been verified, you can then create adjusting entries to reconcile them.

Adjusting Entries

Once these transactions have been identified and verified, they need to be reconciled. There are several ways to manage this, depending on the type of discrepancy. You may need to enter bank reconciliation journal entries that adjust account balances. You may also need to update transactions in your books to match the bank. At the end of the day, the critical issue is that the adjustments are made for valid reasons.

Complete the Reconciliation

Once you have all the discrepancies identified, verified, and adjusted, your bank statement will match your books. Most financial accounting systems have built-in bank reconciliation systems that use a bank to book reconciliation format to record the reconciliation once your books match your bank account. The reconciliations can then be saved and reviewed if they need to be at a later time.

Ready to reconcile your books?

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No? 50% of all small business owners list bookkeeping and accounting as the top item they like least about owning a small business. If you are in this category of business owners, it may be time to hire a virtual bookkeeper.

Why not hire Carly, and join our growing group of business owners who trust Carly with their bookkeeping? Bank reconciliations are her favorite thing! Relax, and let us perform your bank reconciliations. Then you can do what you do best- growing your business.

Resources: https://www.dictionary.com/browse/reconcile