When you get your personal bank statement, you’ve likely taken a look at it to make sure all the transactions look familiar. Bank reconciliation for businesses is a similar review of a business bank statement, except instead of simply scanning the statement, you’re comparing it to your own records to make sure there are no discrepancies between what’s in your software and what’s in your statement. The eﬀect of this is twofold: it helps you detect fraud, and also helps you detect errors in your own data entry.
How Bank Reconciliation Works
How the process of bank reconciliation works is up to you – you can make it as formal or as informal as you like. Some people prefer to produce a document each time they do a bank reconciliation, noting any amendments they made to the accounting ledger. You can do bank reconciliation as often as you’d like; it should be done at least monthly, although if you’re in a high volume or high risk enterprise, it’s advisable to do it more often. It’s pretty common for the book records to diﬀer from the bank records a little, since incoming or outgoing payments you recorded may not have hit the bank yet – however, doing a bank rec will make you aware if something unexpected or odd is happening with your account.
Why Bank Reconciliation is Important
As mentioned above, bank reconciliation detects fraud and helps uncover transactions you may have overlooked when making accounting entries. The importance of detecting fraud is clear: you’ll be able to stop any suspicious activity before it has a signiﬁcant impact on your business. However, there are many other ways that bank reconciliation can save you hassles down the road. Here are a few concrete examples:
1. It may remind you to create accounting entries for automatic payments
It’s easy to forget about automatic payments that come out of your account for things like rent, online subscriptions, and bank fees – but it’s important to include them in your accounting records. Left out for long enough, the records you keep in your books won’t reﬂect what’s in the bank, and you can be misled about your cash ﬂow. It’s embarrassing to write checks that bounce, and it’s easy to do if you’re running a business under a tight budget. Regular bank rec will keep you aware of exactly how much money you have on hand for your business.
2. You’ll catch NSF cheques from clients
It happens to your clients, too – NSF cheques are cheques that have bounced due to insuﬃcient funds. It’s best to follow up on these as soon as possible so the client can reissue another cheque or arrange for a future payment while the invoice is fresh in their mind. If you put oﬀ bank rec and catch an NSF cheque after a few months, it can take longer to resolve, since your client will have to dig back into their records to ﬁnd the old invoice and create a new cheque for it.
3. You may discover EFT payments made by clients which aﬀect their statement
If you take EFT payments from clients, this may be a reason why it’s a good idea to check your most recent bank statement before starting your collections process. Most of the time, clients will email you the remittance information for EFT payments so you can enter them as they hit your account. But sometimes, an EFT payment will happen and the remittance will be sent to the wrong email account or not sent at all, so you will miss entering the payment in your software and their statement will show their invoices as unpaid. If you don’t check before sending collections emails, you may end up accidentally asking a client to pay an invoice they’ve already sent payment for.
4. You may discover errors in your bank statement or accounting records
Even if nothing ﬁshy is going on with your account, it does sometimes happen that the bank makes an error. Occasionally, withdrawals or deposits may get recorded twice, or there will be a transposition error. These errors are rare and usually minor, but when every dollar counts, it’s good practice to catch them when they happen. You may also ﬁnd that you’ve accidentally recorded a deposit or payment twice, throwing oﬀ the balance in your books – when you compare them against your bank statement, it sheds light on these errors so you can correct them.
5. You need to record interest earned
If you’re small and just starting out, the interest you earn may be minor, but it’s good to keep precise track of smaller details, since these can add up over time. Also, it may not seem important now, but as you earn more money and your principal grows, your interest may become signiﬁcant enough that it aﬀects your bottom line.
Even if you think you’ve recorded every single transaction, a bank reconciliation can often surprise you. It’s important to check your bank statement often to maintain the ﬁnancial credibility of your accounting records. Just as you wouldn’t depend on the weather report without looking out the window, you shouldn’t place all your faith in your books without looking at your bank statement.