Simply put, a bank reconciliation allows you to agree with the bank balance at the end of a period (usually monthly) by comparing your own record of deposits and withdrawals with that of the bank, and justifying any differences between them (usually outstanding cheques and deposits, bank charges, and interest deposits). Most commonly, a bank statement is used but with the advent of online banking, a printout of transactions can also be used.
The primary objective of a bank reconciliation is to find unauthorized transactions, which may be the result of fraud. It is extremely important to perform a bank reconciliation as soon as possible, since most banks will reverse the charges if they are caught quickly enough. Ideally the bank reconciliation for a given month should be completed before the following month has elapsed. This way you can always remain up to date, minimize the risk of fraud causing lasting damage to your business, and make sure your ledger is as accurate as possible.
When performing a bank reconciliation, it is important to remember that many withdrawals are now automated – you should keep a record of all authorized recurring charges you have approved. You may have forgotten to enter these into your ledger and performing the reconciliation will remind you that they exist. Outstanding cheques which may have been written months ago may not have been cashed or deposited by their recipient until now – in addition, EFT transfers promised by clients who have received your invoices may have been delayed and you may see deposits that were already recorded in prior periods. This is another reason why bank reconciliations are so useful – they allow you to learn which of your vendors and which of your customers is slower to complete a cash transaction, which has benefits and drawbacks depending on the situation.
Many bookkeepers forget to enter bank charges into their ledger. These charges may be a small, consistent regular amount (say $10 per month) or they may vary depending on the number of transactions. There may be additional charges from wire or EFT transfers. If any cheques issued by the firm have bounced (NSF), then the bank will charge an NSF fee. This is true whether you have issued the cheque to a vendor or a customer has issued a cheque to you. If you operate a point-of-sale business, there may be transaction fees. If you are overdrawn, there may be overdraft fees. These must all be entered into the general ledger.
On the other hand, your bank account may provide you with interest if you maintain a high enough positive balance. This can be entered into the ledger as a source of revenue.
With regards to cheques issued by the firm, make sure you keep a list of the cheques numbered, their intended recipient, and the amount, in sequence. Holding on the cheque stubs in the chequebook is ideal for this. Most bank statements come with cheque images so that you can compare the two and make sure the cheques have not been modified in any way.
As previously mentioned, all transfers out should be carefully checked against any list of recurring transfers.
Be sure to check all deposits in the bank against recorded deposits – make sure that none are missing. These is especially important for deposits of items which are brought to the office by hand or by mail – in other words, non-transfer deposits. There should be a deposit book for such deposits, and these should match with the list of deposits in the general ledger.
Performing regular and routine bank reconciliations may lead you to find that the way your bank handles your account, and the charges they incur, are not to your satisfaction. Especially if there are many errors on the part of the bank, you may wish to do your banking elsewhere, or at the very least find a banking solution which better suits your needs.
Bank reconciliations are also important for bookkeeping and accounting purposes, as it ensures that the bank balance at the year-end is accurate, and gives you a clear picture of outstanding deposits and cheques, as well as your schedule of accounts payable and receivable, and a more complete picture of all your revenues and expenses.
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