Bank reconciliations are an essential part of the small business bookkeeping process. Regularly scheduled account reconciliations ensure money spent matches the money leaving the account. This is especially important for businesses to prevent accounting errors, such as overstated income or expenses, inspect fraudulent activity, and ensure accurate financial reports.
What is bank reconciliation?
Sometimes, novice bookkeepers assume that the process of recording transactions in the business accounting system is also the process of reconciling an account, but this is incorrect. A bank reconciliation is a comparison of the transactions added to a business’s accounting records with the transactions recorded on the statement provided by the bank or financial institution at the end of a fiscal period.
Simply put, reconciliation is the process of double-checking that all of the entries added to the accounting system for a certain period of time are accurate by comparing them to the bank statement for the same period.
How to reconcile a bank account
To reconcile an account, verify each transaction in the business’s accounting software or register for a given period against the bank’s records for the same period. The starting and ending dates on the bank statement determine the period for account reconciliation, and the ending balance on the bank statement determines the actual money in the account at the end of the given period.
Tip: Make sure the bank statement or report shows both the ending date and ending balance for the period to be reconciled.
Review the transactions on the bank statement line-by-line and match each record to the corresponding transaction in the business accounting software or general ledger. Transactions that matched the bank statement are marked as “cleared,” and any that did not are considered “uncleared.”
If all the transactions are marked as cleared, and the ending balance on the bank statement matches the ending balance for the same period in the general ledger, the account is reconciled. If there are uncleared transactions and the ending balances do not match, search for duplicate transactions or accounting errors in the general ledger. Always consider the bank statement as valid and accurate, because it reflects the actual money that left or entered the account. Accounting mistakes, duplicated or missing transactions, miscalculations, and other errors may occur in the general ledger. Unrecognized or altogether missing transactions on the bank statement may indicate fraudulent activity on the account.
Why is it important to reconcile bank accounts?
There are many advantages to reconciling a bank account, such as ensuring accurate bookkeeping, inspecting fraudulent activity, and preventing administrative problems. Not reconciling accounts can expose a business to risks, including over or understated income and expenses, financial fraud, human errors, and misappropriation of funds. Preparing and reviewing bank reconciliation reports mitigates these risks by ensuring that the data in the business accounting system is accurate and up to date.
Ensure the business accounting system contains only correct entries.
Sometimes mistakes and technical errors can occur during day-to-day bookkeeping. For example, an expense may be entered twice, or a deposit could have been manually recorded for the incorrect amount. Bank reconciliations reveal small errors that aren’t readily visible in broader financial reports. Bank reconciliation provides opportunities to catch and correct accounting errors in the present and to learn from mistakes going forward for better bookkeeping in the future.
Detect and prevent internal fraud.
No business owner wants to think a trusted employee may be stealing money. Still, as a small business owner, it’s vital to set up a system of checks and balances to ensure the business’s hard-earned money is safe. One of the best ways to catch internal fraud is by monitoring bank statements. The bank reconciliation process examines each transaction and ensures small, odd transactions that weren’t approved and would otherwise be missed are caught before long-term embezzlement or fraud can occur. If the business owner cannot personally perform reconciliation reports, hire a third-party accounting firm to check the records for accuracy, and generate reports for the owner to review. In-house bookkeeping is okay for the day-to-day maintenance of financial records. However, a third-party review of in-house record keeping ensures that reconciliation reports remain thorough and unbiased.
Prevent administrative problems and insufficient funds.
The bank reconciliation process is a great time to scan the account for outstanding checks, and if necessary, investigate why a check or payment hasn't been cleared. You may also catch missing or double-entered checks or payments, causing income or expenses to be over or understated. Reconciling gives a clear picture of the movement of funds in and out of an account each period, preventing overdrafts or missing payments, and revealing the true financial health of the company.
When and how often should I reconcile my account?
For most small businesses, it’s best to reconcile an account once a month—each time your bank generates a new statement. If a company has a large number of transactions, it may be necessary to perform reconciliations more often, perhaps weekly, to stay on top of the company’s financials.
Whatever the schedule, make regular reconciliations part of your business’s normal bookkeeping process. Even if you don’t have time to perform the reconciliations personally, review the results of the reconciliation process. Accounting programs like QuickBooks Online or QuickBooks Desktop make it easy to generate a bank reconciliation statement that shows every cleared and uncleared transaction. Evaluating regular bank reconciliations assures confidence in the data from your accounting system and provides critical information to business owners and decision-makers.