Beginners guide to Bank Reconciliation

Whether you’re a small business owner or just venturing out into the world of business, one of the things you need to pay close attention to is the ‘Bank reconciliation’ process it is key when it comes to business management. If you get what is bank reconciliation it right, you’re on your way to being in control of your finances. But getting it wrong means you could end up overpaying your tax.

In case you’re wondering what is a bank reconciliation and what else the process entails, This blog aims at answering your questions and provides you with some practical advice to help ensure your books are up to date! Before we move on let’s stop for a second and understand that it is crucial to enter all your transactions into your business accounting system first and then you can move on to bank reconciliation.

What is Bank Reconciliation?

Simply put, it is the process of ensuring that your business’s accounting records match the information in your bank account. The process includes your businesses opening balance, closing balance, and individual bank transactions. A bank reconciliation should be prepared regularly to mitigate the risk of duplicate transactions in your ledger book.

For example: Imagine you buy a bus ticket for a business trip on your company debit card and see this appear on your bank statement, you will need to record the transaction in your accounting ledger. If you don't do it, your accounting records will show a different figure in your bank account. This process of recording and matching transactions is bank reconciliation. You must be thinking why should a bank reconciliation be prepared? Let’s explain the purpose of bank reconciliation in this piece of writing.

Bank reconciliation also helps you keep track of other financial aspects of your business banking, it allows you to check what money has come into your account or what money has gone out of your account and thereby identify any suspicious activity which takes us to the next point. That's why it is important to reconcile your bank statements.

Why is it important to reconcile your bank statements?

Understanding why bank reconciliation is important is the ultimate thing to achieve success in your business. Getting the process wrong would leave you with an inaccurate view of how much money is in your bank account, which could have costly consequences for your small business. A mistake that many small business owners make is not setting the opening balance of their business accounts to that of their bank account before they start recording transactions in their accounting records. Experts also suggest that a bank reconciliation should be prepared periodically because it can save you time and relieve stress.

Purposes of Bank Reconciliation

Advantages of Bank Reconciliation

It helps accounts remain in good standing: When you are aware of the amount that you can spend from your account, you are less likely to overdraw the account, which means withdrawing or attempting to withdraw more money than what your account has. Overdrawing from your account could also negatively affect your credit score. While some banks offer overdraft protection, they would charge you a fee for using that particular service. And if you do not have this type of protection on your account, it may create more problematic situations.

It protects you from theft: when you compare your bank book’s transactions with the bank’s financial transactions, you will be able to spot discrepancies, like, entries that are not in your books and by examining further it becomes easy to spot these discrepancies. However, more importantly, this will reveal bank transactions that were unauthorized by you, revealing evidence of attempted theft. This is one of the main purposes of bank reconciliation.

It keeps mistakes at bay: You can tell whether a bank is reliable based on the procedures it implements to help you avoid making mistakes with your account, but even so, mistakes do happen, most commonly due to a simple entry error. However, banks will be able to correct these errors when you point them out after the reconciliation process.

Easier to spot accounting errors: After getting a hands on what is a bank reconciliation, you will be able to detect accounting errors that occur in business sometimes, such as, addition and subtraction errors, missed payments or double payments, and even lost checks. For example, if you make a mistake in your ledger and add an invoice as “paid” when you haven’t, the bank reconciliation process will reveal that you have not written the cheque. There Could also be a case when the bank adds money to your account by mistake and even so you will be liable to return that money, irrespective of whether you spent it.

You will have accurate records: The purpose of bank reconciliation is to reveal which cash transactions have been cleared and which ones are still outstanding.
Helps you build rapport: A bank reconciliation should be prepared periodically because it will help you build a good rapport with the bank.

Tracking your Interest and other fees: some banks may add fees or penalties on your account or even add interest payments. A bank reconciliation should be prepared monthly to add or subtract the amount in your books. The purpose of bank reconciliation is to match your credit and debit details. By chance if a small business owner ends up entering the same data twice, this bank reconciliation process will ensure to spot it out.

You need to stop and think about transactions: As mentioned in the advantages of reconciliation, if you type in transactions manually between your bank statement and ledger, you could skip transactions and fail to log in a transaction. This would make it look like you’re under-reporting your sales and authorities might see this as a sign of you trying to pay less tax than you should and that could trigger an inspection from the tax department.

On the other hand, if you add a transaction or accidentally double-count a few transactions, you’ll be liable to pay more tax than you actually require. It can be time-consuming and costly to rectify these mistakes. However, there is no need to worry and you should not be doubtful about why a bank reconciliation be prepared? A bank reconciliation should be prepared frequently. The ideal frequency of performing bank reconciliation should be monthly for a small business..

Modern technology can help: You can use QuickBooks for your business accounting needs and also make it easier with accounting automation software offered by SaasAnt that have far greater functionality and are less prone to errors. Face it, we are prone to error as human beings due to the distractions we face on a daily basis and incorrect balances or discrepancies in transactions can lead to unnecessary complications financially such as bounced checks and overdraft fees. This is where accounting software would be more accurate. These accounting software systems take a lot of manual work out of retrieving information from your bank statements, by keeping all your books online and in one place. You can track your cash flow, manage bills, make payments, keep a record of invoices, receipts, and much more. This will make the process efficient and easy.

Now that we know you have help, when it comes to keeping your records clear, we can get into the process of

Reconciling your Bank Transactions

If you’re wondering how to do a bank reconciliation, there is a bank reconciliation format and you can break it down to five simple bank reconciliation steps:
Get Your Bank statement: This can be done via online banking or by the statement you receive through post/email.

Have an accounting system ready: Even if you manage your business through software like SaasAnt, have your records in front of you. It’s best to do your bank reconciliation on a monthly basis, so have your system open whenever you wish to understand when a bank reconciliation should be prepared..

The opening balance in your accounting system should match the opening balance of your bank statement: If you don’t make your opening balance amount into account, the balances won’t match in the end.

Why a bank reconciliation should be prepared periodically:

Regardless of whether you’re doing this manually or with the help of software, remember to perform a bank reconciliation process periodically and get the statement.

Your closing balance should match the balance on your bank statement: Once you’ve reconciled your transactions and checked them, the balance in your accounting system should match your bank statement and if it doesn’t you may have to go back to step 3.

After you've followed these bank reconciliation rules or steps and your bank balance matches the balance on your business books, your transactions have been reconciled successfully.

An important point to remember is, when you use cloud accounting software, you may be asked or prompted to “explain” your transactions after they are reconciled. This allows the software to be able to organize the transaction in your accounts.

Before you reconcile your accounts, it’s important to be sure that you’ve made all necessary adjustments to your business accounts. Whether you hire an accountant to check for discrepancies or you do it yourself You must make adjustments to your cash accounts if needed, you should also identify and correct any transactions that may or may not have been entered into the books. You must also make adjustments to reflect income or payments, credit-card charges, and so on.

That’s why a bank reconciliation must be prepared. Ideally, a bank reconciliation should be prepared periodically because it helps to understand the transaction in a much better way. Hope now you know why it is important to reconcile your bank statements and how it can impact the small  business accounting directly.

When you get your financial information right and your accounting records match the bank’s records when it comes to the amount of cash you have in your accounts, it means you have successfully completed the process and can be stress-free. However, you should also note that the day you close your books probably isn’t the same day that the bank sends its statements, so do your best at balancing the books internally. We hope this article on what is a bank reconciliation would help you to manage your bank reconciliation process in a better way.