In a perfect world, you’d be able to look up your business’ bank balance and it’d always match your accounting records, giving you a flawless, real-time picture of your company’s available cash. We don’t live in a perfect world yet. We still exchange cash via paper check creating timing differences. But consistent bank reconciliation provides accounting records that are clear, reliable, and up-to-date.
Simplified, bank reconciliation is like balancing your checkbook. You compare your accounting records to the bank’s recorded transactions and ensure that everything matches. Depending on the size of your business, this is typically completed daily, weekly, or monthly. We recommend all businesses reconcile at least twice a week; online access to bank transactions makes this easy.
A bank reconciliation enables you to maintain an accurate financial picture by guaranteeing that your cash-based financial reports are accurate. There are often differences between your books and the bank statement. These are usually due to timing: deposits still in transit, checks not yet cashed, etc. The reconciliation ensures you’re aware of these discrepancies and able to explain them. This is a necessary part of proper accounting.
Sometimes you can’t account for the differences. Bank reconciliation quickly identifies errors in bookkeeping. Sometimes an item is missed and goes unrecorded. Or perhaps it’s recorded twice, or off by just a few cents. Left unchecked, these small mistakes can build, leading to bigger problems. You no longer have a reliable vision of how much cash you truly have available. Your financial reports are inaccurate, since income and expenses may be over or understated. You’ll also be able to catch other errors. Deposits may not have made it to the bank. Checks you’ve written may have been sent to the wrong address, lost, or just never cashed. Sometimes the bank makes the error. Reconciliation provides a simple method of finding and correcting these mistakes.
Since many financial transactions are made electronically, regular review of bank activity ensures you’re capturing items you may not otherwise be aware of. You’ll also stay on top of any unexpected charges such as bank fees or bounced checks. Bank reconciliation means there’s no surprises.
This brings us to an unfortunate reality of conducting business today: fraud. When you’re actively monitoring your company’s bank account against your records, you’ll quickly spot any fraudulent activity. Banks often require a rapid response so it’s imperative that any scams are identified as soon as possible. Therefore, bank reconciliation provides an important safeguard.
Reconciling your bank accounts on a regular basis protects your business, provides accurate financials, and allows smooth day-to-day operations.