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.
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.
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 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:
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.
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.
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.