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Everything you need to know about Account Reconciliation

Entrepreneurs, small business owners, and CEOs of large corporations are all responsible for monitoring an organization's financial health. And, at the end of the day, it's a business leader's responsibility to ensure all accounts are balanced and accurate. Every account from bank accounts, to accounts payable ledgers and accounts receivable reports, must be accurately reconciled using real numbers that represent the true business activities. Businesses use these numbers for creating operating budgets, applying for loans, and meeting payroll.

Even if you have an outside accounting firm that creates financial statements and prepares tax returns, their records are only as good as the information received from a business's internal records.

Understanding What Goes into Reconciliation At The Organizational Level

Bank Reconciliation involves determining exactly how much money your business has in the operating checking account at a given period. Posting every transaction, such as deposits and checks issued, provides the basis for an accurate, up-to-date daily checking account balance. The end-of-month reconciliation is a process that ensures invoices and contract payments were accurately posted to appropriate individual ledgers.

A business must reconcile each ledger account to generate accurate financials, and there are many types of reconciliation, including bank account reconciliation.

  • Bank Account Reconciliation (determines cash on hand in checking and savings accounts)
  • Business-Specific Account Reconciliation (involves balancing unique transactions related to specific activities, such as calculating inventory value for stock held in storage for future sale)
  • Customer Account Reconciliation (accounts receivable, reflects payments and charges to revolving customer accounts)
  • Financial Accounts Reconciliation ( confirms cash withdrawn equals cash spent, and cash deposited equals cash received for business activities)
  • Inter-Company Reconciliation (tracks moving money internally between various accounts)
  • Vendor Account Reconciliation (accounts payable, reflects amounts charged, but not yet paid for products and services)

No matter which type of reconciliation you are working on, the process is the same. You start with an accurate opening balance, add all positive transactions, and subtract all outgoing funds to reach a balance supported by relevant documents.

Balancing A Business Checking Account: Step by Step Instructions

Balancing a business checking account shows the basic steps one would take through any of the types of reconciliation processes. You must start with an accurate opening balance. So, for bank account reconciliation for April, you could start with an accurate ending balance from the March statement.

Assuming the bank statement issued by your financial institution is accurate, the process would look like this:

  • Start with the ending balance on your most recent bank statement, add deposits made during the current period, but not reflected in the statement.
  • Then, subtract the total of all checks and drafts issued, but not cleared through the bank at the time of statement closing.
  • Next, add or subtract any errors made by the bank and/or internal staff.

Once you're confident the adjusted bank balance is correct, you'll need to verify the accuracy by comparing the bank reconciliation to your general ledger records. To do this, you compare the general ledger cash account to your bank balance. Address any differences revealed in your reconciliation process. You may need to review the sub-ledger accounts to balance the general ledger cash account against the bank statement. Perhaps a check was written and not listed as a bank transaction in transit. Or, your counter staff may have failed to record a customer payment on account properly. Manually entering cash-in and cash-out transactions might involve human errors, such as transposing numbers or duplicate entries.

If you find any error that needs adjustment, these items should be listed separately on the reconciliation statement sheet you use to balance your accounts.

Why The Bank Reconciliation Is Very Important For Business Success

Performing bank reconciliation tasks do more than just help a business leader keep an eye on bank balances. There also allows leadership to spot processing errors caused by duplication and calculation mistakes. While reconciling the bank account, you may find that bank fees have gone up and your company is paying unnecessary fees related to overdrafts. You may even discover some transaction fees could be eliminated by switching the bank account type you currently use.

Another benefit of routine reconciliation is the ability to uncover skimming and other fraudulent activities that often come from both external and internal sources.

Should You Schedule Monthly Bank Account Reconciliation?

Most successful business leaders choose to establish a policy that includes completing reconciliation tasks daily, weekly, or biweekly. However, depending on the size of your transactions, daily sales volumes, and how large your staff is, you may find that monthly bank reconciliation is sufficient. Even when an organization has an in-house accountant and support staff who normally assume responsibility for monitoring financial health, best-fit practices demand the one at the top also knows what type of reconciliations there are, and how to prepare and interpret each one.

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