As the owner of a business, big or small, you have to keep a tab on its finances. As a creative person, it may seem a rather tedious task. However, this is a crucial process to maintain the well-being of your business.
One such process that you would probably feel like delegating is bank reconciliation. It seems to be never-ending and can take up a significant amount of time, depending on the scale of your business.
However, bank reconciliations are essential to maintain balance in your business. In this article, we have detailed all the necessary information about the process so that you can equip yourself with the knowledge of how to implement this for your small business.
Bank reconciliation is the process of matching the transactions in your book of accounts with your bank statement. It involves the scrutiny of every line item in your accounts to ensure that it is accurate. As you do this, you also record every discrepancy so that you can take it up with your accountant or the bank.
Whose Responsibility Is It To Perform Bank Reconciliations?
The answer largely depends on the scale of your business and who handles its bookkeeping. If you have a relatively small business and can manage the bookkeeping on your own, bank reconciliations become your responsibility.
However, if you work with a bookkeeper or have availed of an online bookkeeping service, they will take care of it. Depending on the volume and value of bank transactions, you may have to establish a frequency for bank reconciliations.
If you have gone through the lengthy process of bank reconciliation, you may wonder if it's worth the time. Well, here are a few reasons that will compel you to follow it diligently every month.
Your book of accounts is the true reflection of your business' financial health. It helps you make crucial decisions related to expansion, new product launches, taking loans, or giving returns to your shareholders. Discrepancies in your accounts could result in wrong decisions that may adversely impact your business.
When the data is incorrect, you could end up spending money you don't have. On the contrary, you could be taking debt with higher interest rates when you have more than enough money. When your accounts are incorrect, you may not be aware of this amount.
When you are running a business, you would want to keep track of your business' cash flow. After all, you need the cash to pay your expenses and taxes, repay your debt, and purchase new assets.
With knowledge of your cash flow, you can avoid bounced checks when paying your partners and suppliers. Similarly, you can keep track of pending payments and follow up with the payees.
As individuals, we'd often like to fully trust the people we do business with. However, the reality could be different. Although trust and faith are the pillars of running a successful business, you also need to safeguard yourself against fraud.
Bank reconciliations can help you identify such fraud. For instance, you may notice while reconciling that your vendor has withdrawn a larger sum than you had written in your check. Or, you could find that your business partner has withdrawn an amount that doesn't match what's mentioned in the book of chart of accounts.
Although it is rare, banks can also make mistakes. If you come across an entry that doesn't seem correct, you can contact your bank and have it rectified.
Bank reconciliation allows you to get an accurate view of your accounts. You get a precise understanding of your cash flow and liabilities. Such information helps you make informed decisions for your business.
Before you begin bank reconciliation, you may want to ensure that your books are updated. Else, your time and effort could go down the drain. With that taken care of, you can follow the steps below to do your bank reconciliation.
Now that you have the records from your accounts and bank statement, you can start checking your cash balances. The process involves comparing the records of sales and expenses against your bank transactions.
The starting point should be the last time the balance in your book of accounts had matched the balance in your bank.
You can start by running through the deposits in your bank statement. They should be marked as income, interest, refund, or under another appropriate header.
Next, check the income in your books and ensure that each entry matches the deposits in your bank statement. Find out if something is missing.
Once you have completed this activity, move on to bank withdrawals. All such entries should be recorded in your books. At this point, you may want to keep track of bank fees that often come in the way of reconciling.
Check the expenses in your book of accounts and ensure that every withdrawal has a matching entry on the bank statement. In the end, when you have checked all the deposits and withdrawals, the cash balance of your bank account should match the balance in your books.
If you find any discrepancies in Step 1, you should record them. You can either adjust your journal entries by recording the differences and mentioning why they exist between the bank statement and ledger.
On the other hand, you can create a separate document to record them. You can make your choice depending on which method you find easier to follow. Always consider any future scenario in which you might have to refer to your books and follow a method that will make this process easy.
Let us consider this bank reconciliation example to give you more clarity. Suppose in a month, your bank balance shows $1050, and your cash book balance shows $1300.
Now you know that there is a discrepancy. To resolve this, you can go through your bank statement first and find any transactions that have not been recorded in your cash book. These could include bank fees or checks that have been missed.
In the next step, add them to the cash book and adjust the entries to match both the balances.
Also understand the profit and loss statement template company's income and expenses for a period of time
Well, the answer largely depends on the volume of transactions your business processes. Large businesses that have multiple transactions entering and leaving their accounts every day do it daily. For instance, the supermarket in your neighborhood will have to do it every day.
However, a small business that sells a few products a week can choose to do it weekly or fortnightly. It is essential to decide a frequency so that you can stay on top of your finances.
If you do it once every few months, the task may become a lot more cumbersome. Firstly, you may not remember a few details, or you could be too late in detecting any instances of fraud. Secondly, you will not know the exact cash flow in your business and may make uninformed decisions.
As the owner of a small business, bank reconciliation is something that you cannot miss. If you feel you are too pressed for time, you can consider hiring a bookkeeping service like Fincent to take the burden of bank reconciliation off your shoulders.