By admin, December 18, 2018
Share this...
Writing cheques, depositing cash in a bank account, and making and receiving online payments are some of the transactions that every business makes. The same is recorded by your bank in your account. But, have you ever wondered what would happen if one day you notice that your monthly bank statement doesn’t match your cash balances? Scary, isn’t it? That’s when you realize the importance of bank reconciliation.
Whether you’re a small garment manufacturing company in Downtown Oakville or a renowned accounts receivable service provider in Toronto, bank reconciliation is a significant process for all businesses that can save you from a lot of complications, irrespective of the business size and industry type. It is a necessary process that compares your internal financial records against the records provided to you by your bank to identify unusual transactions or accounting errors.
If the term ‘bank reconciliation’ is new to you, read this blog post by our expert bookkeepers to learn essential things about this significant process.
Your monetary transactions are recorded by the bank in a bank statement provided to you every month and you record those transactions in your cash book or other accounting records. If both books show a different balance, then a bank reconciliation is required.
Bank reconciliation means comparing your bank statement to your accounting books. It includes going through each transaction individually to make sure that the amounts match in both the statements. If they don’t match, you need to make adjustments to your accounting records and create a bank reconciliation statement to find out what went wrong. Also, notify the bank if the error is on its end.
The discrepancies that lead to mismatched balances usually occur because of your mistakes, bank errors or difference in timing. Some of the common reasons for the difference between the books are-
• The amount deposited directly in your bank account by a client. The bank records it in your books but you don’t as you’re not aware of it.
• You write a cheque at the end of a month and record it immediately in your books. However, the bank processes it a few days later, maybe next month.
• The bank deducts bank charges from your account but you don’t notice it.
• A customer deposits the cheque in your account but he/she doesn’t have sufficient fund in his/her account. You record it but the bank doesn’t as it becomes an NSF (Not Sufficient Funds) cheque.
A monthly analysis of your accounts by reconciling the statement is helpful for identifying problems before it’s too late. It doesn’t take much time but can cause severe damage if overlooked. Take a look at some of the benefits that you can reap by reconciling your bank statements regularly.
• Monthly accounting reconciliation is a great way of eliminating accounting errors that often go unnoticed in your daily transactions. These errors can be a sign of fraud that should be taken care of before it goes out of hand. That said, monthly assessments help keep your bookkeeping identical to the recordings in your bank statement.
• With reconciliation, you can keep track of your transactions. For instance, you wrote a cheque for a vendor but he/she delayed cashing it for a couple of months. This delay can be easily tracked with a monthly reconciliation. Also, whenever the vendor goes for cheque encashment, you will be able to identify why the money was deducted from your account this month.
• Reconciliation helps you verify that the bank fees and charges are valid and in accordance with your account terms or not. If you’ve been charged more than the current rate, then you can notify it to your bank and keep them from happening again.
• If you have monthly bills that are automatically deducted from your bank account, then a technical issue can increase your chance of missing your bills. Monitoring the books help you keep track of all transactions so that you don’t miss a payment.
The bank reconciliation process is easy and quick, but following the tips mentioned below can make the process more efficient.
• Have all necessary documents and information on hand to match every transaction in an organized way.
• Reconcile in sections, for example, begin with the closing balance of the previous month so that even if an error is found, there will be no need to review everything transaction by transaction.
• Hire a company to outsource your accounting process so that bank reconciliation is handled with the help of accounting software like QuickBooks.
To make the most of your bank reconciliation process, review your accounts at least once a month. If you’re a large-scale business with a higher risk of fraud, you can reconcile your bank transactions more frequently. However, if you need assistance in handling your accounts payable, accounts receivable and bank reconciliation processes, you can contact our virtual bookkeepers. We are the leading online accounting and bookkeeping service provider in Toronto. Get in touch with us for more detail.
The Virtuous Bookkeeping explores ways for entrepreneurs to enjoy independence and better run their business. Join over 10,000 subscribers and get our best articles delivered via email.
