When it comes to keeping business accounts in check, bank reconciliation can make a huge difference in saving your company time and money. It improves accuracy and significantly reduces the possibility of mistakes, making sure that both your business records and bank account are always updated correctly.
Bank reconciliation involves comparing your company’s books with the company bank account to make sure that every transaction is accounted for and there are no discrepancies between the two.
The purpose of keeping on top of bank reconciliation is to keep records as accurate as possible and identify any fraudulent transactions. It also helps to give you a consistently clear picture of your company finances, reducing the possibility of overspend or miscalculation.
Although there are a number of reasons why discrepancies may occur, and it can often be down to simple human error, they can also be a sign of fraud and should always be taken seriously and thoroughly investigated.
The more swiftly any possible fraud can be identified, the sooner it can be stopped and the potential damage minimised. This means that for some larger companies, it is necessary to carry out bank reconciliation on a daily basis, while for smaller companies it may only be necessary to complete it at the end of each month.
If you’re looking into bank reconciliation for the first time, here are the steps you need to keep in mind to make the process work for your business.
Your chosen method of bank reconciliation will depend on how you choose to do your company’s accounting more broadly. You might take the traditional approach of a paper chequebook and a balance book that you closely monitor and keep up to date, or a spreadsheet into which you manually enter data – and there is nothing wrong with either of these approaches, as long as all the relevant documentation is handled securely. Hard copies of transactions also help to reconcile the account in the event of any errors.
However, an increasing number of businesses have been turning to accounting software and apps in recent years, and there is specially designed automated bank reconciliation software that can help to smooth the whole process. Integrating these technologies into your accounting will completely change the way you work, but it can both save time and reduce errors.
Firstly, you should look at your company records and compare them to your most recent bank statement, checking that all deposits listed on the statement are also in the company record. If not, they should be added and the balance updated accordingly.
Repeat this process the other way around, checking that all deposits listed on the company records also appear on the bank statement. If any are missing, this needs to be investigated with the bank. You might choose to set up banking alerts in future so that you are notified by email or text each time a deposit appears in the company bank account.
Now undertake the same process again, both ways around - focussing on withdrawals rather than deposits. Is there a transaction missing from your company record or bank statement?
As with deposits, if the transaction is missing from the company record it can simply be added in and the balance updated, but if it’s absent from the bank account this needs to be looked into further. It may simply be that a cheque has not yet been cashed.
If transactions are missing from your company records, this may be because of bank adjustments. You may have been subject to fees such as overdraft charges.
It may also be that the account has earned interest over the most recent financial period. Either way, the records need to be corrected and the balance adjusted accordingly.
When adjusting your records to reflect any missing transactions that have been added, you need to make sure that all charges and deposits are accounted for in the company cash account.
Unexpected charges and fees are less likely to happen the more often you reconcile your account, because you will have a clearer and more up-to-date picture of exactly what the company can spend.
Once you have completed the reconciliation process on both sides, it’s important to double check that you haven’t missed anything by comparing the end balances in both the company record and the bank account, and confirming that they are the same.
If they are not the same, you need to repeat the reconciliation process to identify any errors that you have missed.
Not only is bank reconciliation a straightforward procedure if you follow the above steps, but there are several benefits that it will bring to your business – alongside streamlining the accounting process.
At AccountsIQ, we can help you to move to automation in all aspects of your accounting, including bank reconciliation. Visit our website to learn how to integrate accounting systems into your finance processes.