Reconciliation is the method of verifying the accuracy and consistency of your financial statements.
Reconciliation also helps identify and explain any discrepancies that may arise when comparing daily, monthly, quarterly, or annual statements.
It is best to reconcile your accounts regularly. Not only is it important to keep track of the money coming in and going out of your business, but it also helps maintain the long-term financial health of your business.
Here's a look at the new world of bank reconciliation and some ideas you can use to make sure your bank account is correct.
Simply put, a bank reconciliation guarantees the accuracy of your account by comparing all of its assets with those declared by the bank.
The importance of timely bank reconciliations
There are several reasons for performing these account reviews promptly:
Correctly monitor automatic payments: With monthly payments automatically leaving your account, it's easy to forget to account for those payments and have less in your account than you might think. Timely reconciliations also help identify pending payments that need to be put on hold.
Detect a bank error: Banks make mistakes. Reconciliations can help you spot these banking errors. And errors are more frequent with digital payment systems. Often, a small transposition or misreading of a number by the machine can create a payment error.
Detect unauthorized use: If someone walks into your mobile payment app and spends $20 of your money, how will you find out? Reconciliations reveal fraudulent activity that may have been overlooked.
Identify your mistake: Yes, it's hard to imagine making a mistake, but it happens too. It is easy to register the wrong payment amount. The only way to detect this is to look at your account and compare it to the amount you think you paid.
Tips for reconciling accounts
Here are some tips to help you reconcile in the new world of banking.
Combine reconciliation with budget: Use reconciliations to improve your budget. Use the reporting features to categorize your deposits and payments. To compare them to what you think they should be. This shifts the discipline of simple reconciliation to a more planned approach to comparing budget to actual spending.
Reconcile every week (or every day!): No more waiting for the monthly statement sent by mail to reconcile your account. Use the bank's online tools to reconcile once a week or even once a day. This will help identify problems as they arise and is especially important in identifying possible thefts.
Use your favorite app to record your expenses: Secure online applications are replacing the traditional checkbook. You will need to be disciplined to use the online tool when spending money, so look for an app that can easily control your spending.
The way bank reconciliations are done may have changed over the past 20 years, but the vital role in maintaining financial health will never fail.
Common bank reconciliation mistakes made by business owners
Reconciling accounts is smart for any small business. It is common to see self-employed, business owners, and even professional accountants make mistakes from time to time during bank reconciliation.
Here are some common mistakes you should be aware of:
Incorrect verification entries
In general, there are two reasons for an incorrect verification entry:
Pending checks can remain outstanding for a long time, and incorrect checks may be included in the reconciliation. To avoid this error, you should always look at the number of checks in addition to the amount.
Even the most obvious activities should not be overlooked. For example, you may have accidentally canceled your $105 check when you should have canceled your $106 check. Although rare, sometimes simpler tasks can go unnoticed.
Checking everything in advance will avoid a lot of problems in advance.
Cash inflows and outflows
It is common to ignore certain small amounts of cash inflows and outflows in a company's internal records. Whether it's bank charges, ATM transactions, or any other small charge, you should subtract these items from your records.
They might look small on their own, but together they can add up to a large amount and can greatly affect your final balance.
Keep these charges in mind on your month-end statement and change them in your internal records.
Here are some notable fees:
ATM service charges
Automatic payments recorded internally
Bank charges, such as overdrafts and insufficient funds (NSF)
Check-printing fees
Uncleared cheques
It would help if you watched out for any cash inflows that you have lost.
Start by looking for deposits in your internal records that have not yet been registered by the bank and add them to your account statement balance.
Please do the same exercise with your bank account – check with the bank for cash deposits that are not yet in its internal registers and make corrective entries.
A quick tip: If you reconcile an account that earns interest after a few weeks, you may also need to add interest.
Transposition errors
A transposition error is simple: entering a transaction as $34.56 in place of $34.65. You will be surprised how many times you encounter this error.
This error can be identified at the end of the bank reconciliation process, where you will notice that your balance is not properly accounted for.
Because business owners often juggle multiple businesses, they may try to go through the numbers and not pay attention to what is actually written down because the numbers are very similar.
Examining your track record will help you identify these types of errors.
Tip: Account management is very complex for registered businesses and individual entrepreneurs. As a business owner, the best way to avoid mistakes, save time, and operate legitimately is to have a separate business account.
Bottom Line
Regular reconciliation of accounts is essential to maintaining the long-term financial health of your business.
It helps catch errors before it's too late, ensures your balances match internal and external records, and prevents you from having trouble with inaccurate reports.
More importantly, it gives you greater control over your business's cash flow and finances and helps you file accurate taxes, thereby avoiding issues with old Uncle Sam.
FOR MORE INFORMATION OR TO SEE HOW ELLIOT KRAVITZ, ATP. CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.
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Elliot Kravitz, ATP