Essentially, when you reconcile your bank account, you are comparing your internal financial records against the records you provided to your bank. To identify any unusual transactions that might be caused by fraud or accounting errors, a monthly reconciliation is advised, this practice alone can help you spot any inefficiencies.
So, how does bank reconciliation work?
As well as comparing the records mentioned above, you also need to verify each transaction individually, making sure the amounts match perfectly, any differences need to be investigated. You’ll need to make sure your bank statements show your ending account balance and it must match with your internal records. If there’s a difference, you’ll need to explain why they don’t match.
Where can you find the information you need?
Your accounting system should contain all of your internal transaction data or they may be kept in a check register. Alternatively, your bank will provide you with online access and you can download transactions regularly.
If you currently balance your checkbook, then you’re already essentially doing bank reconciliation – go you!
What if there’s a discrepancy?
If you can see some minor differences, its normal, it’s probably due to timing i.e. items that haven’t cleared the bank yet, these cases you will be able to explain easily and you won’t have to worry. Here are a couple of examples you might experience:
- You wrote a check to a vendor and reduced your internal system to reflect the new account balance. However, your bank will show a higher balance until the check clears into your account. These are referred to as outstanding checks.
- An electronic payment may clear into your account the day before or after the end of the month, you may have expected to see it in a different month.
Why do you need to reconcile?
Less protection from your bank
Regularly reviewing your accounts can help identify any problems before they escalate. Business bank accounts are not as protected as consumer accounts, so it’s important for a business to stop problems quickly. You can’t be sure that your bank will cover fraud or errors on your account.
Fraudulent behaviour
Signs of fraud should be your main priority when reconciling your bank account transactions. You need to make sure:
- Legitimate checks that you issued weren’t duplicated or changed – leading to more money being taken from your account
- All checks were correctly authorised
- There are no unauthorised transfers leaving the account, or any unauthorised cash withdrawals
- There are not any missing deposits
Time for an update?
Regular reconciliation allows you to identify internal administrative issues that may need addressing. E.g. you might need to change your recordkeeping system, or revaluate how you handle cash flow, or if you need to update/change all of your complete accounting processes.
Having banking transaction processes in place can result in the following outcomes:
- Avoiding bounced checks
- Avoiding bank fees
- Being aware how much cash you have in your accounts
- Being aware of bounced failed payments from your customers
- Entering all transactions into your accounting system
- Catching any bank errors
What’s the best time to reconcile?
It’s advised that you do it monthly. For high-volume businesses or situations with a higher risk of fraud, you’ll want to check more often. You may also be able to build protection into your bank accounts, for example, many banks offer services that prevent your bank from approving payments out of your account unless you provide instructions to do so in advance.
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