You may have heard about balancing your chequebook or reconciling your bank statements. It’s pretty much the same thing.
Before personal computers, people used to have a chequebook as their main cash management tool. This is where they would record all their purchases and deposits, with the goal that at the end of the day they knew how much they have left over. They then compared the ending total of their chequebook with their bank deposit book and, taking into account money that they were expecting to clear in the future, pray that it matched.
So it is with the modern bank reconciliation. Except this time, you are typically comparing a spreadsheet or a report list of all the transactions that you know have gone through your bank account. You compare that with the statement the bank gives you and update your records of any transactions that have gone through your account without your knowledge.
There you have it: the entire purpose of the bank reconciliation is to make sure you’re not caught flat-footed by any unexpected, unknown, or unauthorized transaction going through your bank account, with the added value of making sure that your records is as complete as possible.
Making the most of reconciliation
Many good ideas and redundancies in bookkeeping are there for your own good (and not just because your accountant is a pain, although that can’t be ruled out entirely). Monthly reconciliation of your bank statements is one of them.
First, it allows you to manage cash better. In reality, the ending balance in your bank account represents two things:
- Money available for unplanned purchases.
- Money already committed/spent and waiting to hit your bank account.
Without proper bank reconciliations, you have no idea how much is already committed, and you can lead your business into a cashflow crunch in a future period.
Second, it demonstrates that you have an accurate idea of your records and transaction flow. You can only reconcile your bank statements when everything is posted and kept up to date. This increases the reliability and integrity of your financial statements, which gives you more peace of mind when forecasting future demands or strategies.
Third, it provides great internal control. Do you know anybody who’s found a transaction in their bank or credit card statement that shouldn’t be there? Regular bank reconciliations can help you detect fraud earlier, and gives you a way to monitor and check that your records are complete, accurate, and up to date. Many banks won’t adjust entries more than 30 days after the statement is issued, so it makes financial sense to do your reconciliations as soon as possible after you receive your statement.
This article originally published on Anne Cabrera’s Sowing Seeds Accounting Services website.