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What is Bank Reconciliation?

by Admin
Accountant Melbourne

Bank reconciliation is the process undertaken by a business to ensure that its accounts are accurate. To do this, a company must compare its balance sheet to its bank statements and ensure that all records match each other. If there are any inconsistencies, you must find out the reasons for these differences and justify them.

In this article, we’re going to delve into the process of bank reconciliation. To help you through this, we’ll outline a few tips to make the procedure easier to manage. We’ll also discuss why accurate record-keeping is integral to your business’ success.

The procedure

For this procedure, you will need your bank statement and company’s accounts for the relevant period. It’s also important to have records of transactions that were completed via cash or other methods that your bank statement doesn’t reflect.

Here is a short step-by-step guide to bank reconciliation:

  1. First, check the list of issued cheques, withdrawals and deposits on the statement and compare them to the company’s accounts. This will help you find any uncleared cheques or deposits that may explain the difference in your balance sheets.
  2. Double-check your business expenses to find any uncleared payments or instances where you paid cash for an item or service.
  3. Make sure there are no errors in the balance sheets (i.e., misreported figures, duplicated entries, etc,)
  4. Referring to the balance on the statement, add any received deposits that are still in transit and deduct any cheques that are outstanding. The result will be what is called at the adjusted cash balance.
  5. Using the adjusted cash balance, deduct any bank fees or penalties incurred.
  6. Compare the company’s accounts with the bank statement again and confirm that the closing balances are the same.

When you and your accountant are going through the balance sheets, it’s important to keep an eye out for a few common issues. During bank reconciliation you might encounter:

  • Voided, missing or uncleared cheques
  • In-transit deposits
  • Lost invoices
  • Double payments
  • Bank fees
  • Transactional errors (e.g., a transaction being entered as debit instead of credit)

Since there’s so much to keep track of, it’s absolutely important that you get the help of an experienced accountant during bank reconciliation.

Why is bank reconciliation important?

Tax Agent Melbourne

To an inexperienced business owner, this procedure might seem pedantic and trivial. However, having accurate financial records can help your business grow in the long run.

For one, it gives you a complete picture of the financial performance of your company. It will give you a sense of what needs to be improved, changed, added or emphasised. In addition, having accurate balance sheets will allow you to see exactly how much money you’re making in different aspects of your business. This can help you remove parts of your business that aren’t giving you great returns. This could be a particular product line, a service or even a role.

Here are a few more reasons bank reconciliation is important:

  • Can help you discover any suspicious activity and fraud
  • Keeps your bookkeeping accurate and clean
  • Helps you Identify tax-deductible expenses
  • Gives you and your tax agent accurate records when filing returns

Generally, it’s good practice to check your records once a month. The shorter the time period is, the easier it is to balance your sheets.

Reconciliation tips

To make the process easier, there are a few things that you should consider doing:

  1. Get a business account

If you haven’t already, make sure you have a bank account exclusively for your business expenses. This way, your bank statements will only reflect transactions that are relevant to your company. There is no need to make things more complicated by mixing up personal and business expenses.

  1. Reconcile frequently

It’s important to check your accounts as often as you can. If you check and verify your balance sheets each month, there will be less things to manage, which in turn, leads to less errors.

By breaking up the job month by month, you save yourself from the possibility of having to review every transaction in the past year should an error be found.

  1. Embrace technology

Nowadays, there are plenty of accounting software that can automate a lot of tedious work for you. Modern accounting programs are fast but they’re also less prone to errors. Of course, it’s still important to have a qualified accountant to quickly verify the records.

A lot of accounting firms nowadays use various types of accounting software. So, if you’re looking for an accountant, make sure that the program they’re using is reliable and meets your specific business requirements.

We hope that this short blog has given you a better understanding of bank reconciliation. If you have any questions regarding bookkeeping, tax returns, accounting software or certain financial issues, be sure to consult a qualified accountant.

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