This is part of a series of the Top 10 Bookkeeping Mistakes Small Businesses make. To read the others, click here.
Running your own business affects your life as a whole – and it especially affects your finances, and your bookkeeping.
Reconciling your business’s books with your business bank statement(s) every month is one of the most basic accounting duties. Whether you do it yourself, or your bookkeeper takes care of it, or your accountant, it’s absolutely critical that it is done regularly.
Although it can sound complex, bank account reconciliation is actually relatively simple. Just compare your business accounts with your bank statement, and make sure there are no discrepancies. If you do see any errors or items that don’t make sense, either contact your bank or supplier, or review invoices to get them resolved. This will ensure that if there are accounting errors, they’re caught and fixed quickly, rather than dragging on to the end of the year and resulting in major financial problems (or at a minimum taking up precious time that you could be using to better advantage).
One of the benefits of using online systems and cloud accounting is that bank reconciliation is easier than ever. In the “old days” (even a few years ago), businesses wrote and received checks, which took days and sometimes weeks to process. Now, with the advent of instant bank payments, Paypal, international transfers, and even smartphone payments, almost everything is done instantly. You don’t look at your bank balance and think it is healthy, only to realize that there are multiple payments still to come out. (Read more about using online accounting systems here.)
If you’re going to reconcile your bank statement yourself, here are a few steps you may want to take. Start with your bank statement balance, and then:
– Add in any outstanding deposits. This would be deposits that you have recorded in your accounts, but they haven’t yet appeared on your bank statement. (Again, with online accounting it is rare for this to happen – many deposits are recorded almost immediately.)
– Adjust for any bank errors. Again these are more rare these days, but can still happen, and you should be on the lookout for them immediately when the transactions are fresh in your mind.
– Subtract any outstanding payments that have not gone through. This can include checks (if you still use them), or any payments that you have recorded in your books, but have not yet cleared the bank.
– Subtract any bank service charges. These can include account fees, deposit fees (some banks now charge fees if you deposit cash or checks), transfer fees, Paypal fees, etc.
– Add interest amounts, if applicable. If you’re lucky enough to have a checking account that provides any amount of interest, add that in!
– Compare your totals. Now that you’ve made the adjustments, compare your new adjusted bank balance to that of your business accounts. If the numbers agree, you’re done! If they are not, go back and see what’s missing. Sometimes it’s as simple as finding the differing amount and realizing that you missed one transaction somewhere; other times it can be multiple amounts or a transaction you missed many months back.
If bank reconciliation becomes an exhausting, frustrating, or time-consuming task (or all three), we’d highly recommend that you either switch to an online accounting system, or better yet hand everything over to your accountant or bookkeeper to take care of.
Finally, don’t forget to reconcile credit card statements and accounts. Many businesses put expenses on their credit card, only to forget to make a payment in time (resulting in late payment and interest fees), or to be surprised at the end of the month at how much is due (meaning that your previously fat bank balance is now rather slim). Keep on top of these, as well.
After all, you can hire a bookkeeper, but no one can run your business like you can!