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Bank Reconciliations: Everything You Need to Know

Putting bank reconciliation at the heart of your accounting process can help to make your business more efficient. Knowing why it matters and how to do it effectively can save both time and money.

Here we explain everything you need to know about bank reconciliation, why it matters, and the difference it can make for your company.

What is a Bank Reconciliation?

Bank reconciliation refers to the process of comparing financial statements to a bank statement. While it can be performed by an individual for their own finances, it’s a process that happens within almost every business. By conducting bank reconciliations on a regular basis, you can detect fraud and rectify mistakes quickly. However, due to the timing of transactions, the cash balance on a bank statement and within the cash balance of a balance sheet are frequently different. The use of a bank reconciliation will tell you whether or not the difference is explainable or actually indicative of an issue.

Companies have the option to conduct bank reconciliations at their own frequency, be it daily, weekly, monthly, quarterly, or annually. Given the deployment of automated bank reconciliations, it becomes feasible and effective to carry out bank reconciliations more frequently.

5 Reasons Why Bank Reconciliations Matter

Bank reconciliations may be tedious, but financial hygiene will pay off. Here’s why it’s a great idea to do them.

1. To See Your Business as It Really Is

When you look at your books, you want to know they reflect reality. If your bank account, credit card statements, and your bookkeeping don’t match up, you could end up spending money you don’t really have or holding on to the money you could be investing in your business. This can also help you catch any bank service fees or interest income, ensuring your company’s cash balance is accurate.

2. To Track Cash Flow

Managing cash flow is a part of managing any business. Reconciling your bank statements lets you see the relationship between when money enters your business and when it enters your bank account and plan how you collect and spend money accordingly.

3. To Detect Fraud

Reconciling your bank statements won’t stop fraud, but it will let you know when it’s happened.

For instance, you could pay a vendor by check, but they could tamper with it, making the amount withdrawn larger and then cash it. You wouldn’t know until the bank charges your account. The discrepancy would show up while you reconcile your bank statement.

Or you might share a joint account with your business partner. When they draw money from your account to pay for a business expense, they could take more than they record on the books. You’d notice this as soon as you reconcile your bank statement.

Hopefully, you never lose any sleep worrying about fraud, but reconciling bank statements is one way you can make sure it isn’t happening.

4. To Detect Bank Errors

It’s rare, but sometimes the bank will make a mistake. If there’s a discrepancy between your accounts and the bank’s records that you can’t explain any other way, it may be time to speak to someone at the bank.

5. To Stay on Top of Accounts Receivable

If you use the accrual system of accounting, you might “debit” your cash account when you finish a project, and the client says, “The cheque is going in the mail today, I promise!”. Then when you do your bank reconciliation a month later, you realize that the cheque never came, and the money isn’t in your books.

Bank reconciliations are like a fail-safe for ensuring your accounts receivable never get out of control. And if you’re consistently seeing a discrepancy in accounts receivable between your balance sheet and your bank, you know you have a deeper issue to fix.

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 increased, and your company is paying unnecessary overdraft fees. You may even discover some transaction fees could be eliminated by switching the current bank account type.

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

Reach Out for Help

Everyone deserves a supportive team of people who care. Cloud Bookkeeping Inc’s team provides monthly bookkeeping and accurate financial reports. We’ll give you financial visibility throughout the year and deliver insights to make strategic business decisions.

Get in Touch with Us for Our Services

We don’t just say it, we deliver – our work speaks for us! Contact us for 30 mins of free consultation and opt for our Online Bookkeeping Service.

Cloud Bookkeeping, Inc.

3281 E. Guasti Road, Suite 700

Ontario California 91761

Tel: +1 (909) 952-3804

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