Why Is A Monthly Bank Reconciliation Important?
Conducting a bank reconciliation each month helps you understand your company’s cash flow, protect against overdraft fees, and guard against fraud. The bank reconciliation process is a vital part of the checks and balances (no pun intended). The best practice is to ensure that no individual has control over all financial transactions for a business.
In your personal finances, you know that your current bank account balance doesn’t accurately represent your available cash. There might be deposits in transit as well as expenses and withdrawals that haven’t cleared yet. The same is true for businesses. Reconciling your bank account balance with your bank statements and company’s cash records is even more important for a business handling large amounts of money.
The American Bankers Association notes that financial fraud against bank deposit accounts in 2018 reached an estimated $25.1 billion. Even without fraudulent activity, you’ll want to ensure that your company’s bank account doesn’t show bank errors, accounting errors, missing deposits, or any unusual transactions.
If you’re concerned about gaining an accurate assessment of your company’s financials, as well as trusted financial advice, CFO Strategies can help. Our team of financial and accounting professionals offers bookkeeping services and virtual accounting services to small business owners in industries including but not limited to: construction, real estate, engineering, architecture, nonprofit services, and manufacturing.
The Bank Reconciliation Process Explained
To conduct a bank reconciliation, you’ll need your company’s bank statement for the month and internal accounting records, including outstanding checks.
First, compare the bank statement balance showing your ending cash bank balance with your company’s ending cash balance in your accounting records. Don’t be alarmed yet if they don’t match. The purpose of a month-end bank reconciliation is to ensure that they do. Here’s how.
Compare the Statements Line by Line
It’s common to notice slight differences between your bank balance and accounting records that you can reconcile easily. For instance, bank transactions such as interest income might appear only in your bank accounts while outstanding checks that haven’t cleared the bank or deposits in transit might appear only in your accounting records. Nevertheless, highlight any discrepancies.
Add to Your Ending Balance
Adjust your accounting cash balance by adding any interest income or bank deposits to your balance that are not in your accounting records. As for deposits in transit that appear in your accounting records but have not yet cleared the bank, be sure to add those transactions to your bank statement as pending transactions.
Subtract Any Fees and Outstanding Checks
Deduct any negative transactions from your checking account such as bank fees or bank service charges. On the bank balance, note as pending any checks that your company has issued to creditors that have not yet been cashed.
Compare Your Adjusted Balances
Once you’ve made all these adjustments, compare your bank balance to your cash account in your accounting records again. Since you’ve adjusted to allow for common discrepancies, both balances should match. If they don’t, you’ll have to dig deeper to find an error—or worse, fraud.
Common Errors in Monthly Bank Reconciliations
If you are unable to reconcile your bank records with the cash account on your balance sheet, you might worry about having sufficient funds on hand to cover your expenses. Before considering the possibility of fraud, however, look for these other common errors:
- Transposition: Sometimes, human error transposes (or reverses) two digits when recording a transaction. For instance, if you wrote a check for $230 but then recorded it as $320 in your accounting software, you may think you have less cash on hand or potentially even insufficient funds depending on the state of your business. Downloading transactions directly into your accounting software online can help reduce the likelihood of such errors.
- Forgetting a transaction: We’ve all had days where we get caught up in several activities at once. While you might intend to diligently process entries in your accounting system, it’s possible that you made a deposit or issued a check without recording it immediately. Go back to your general ledger and compare stubs or receipts to find any missed transactions.
- An incorrect opening cash balance: If your accounting software starts with an incorrect beginning balance, your account won’t reconcile. This might occur if you haven’t reconciled these bank accounts before or if your previous bank reconciliation was incorrect. Check through earlier months’ statements to see if you can find the error.
- Journal entry mistakes: During a busy day, it’s possible that you accidentally credited a debit as incoming cash or vice versa. Compare your journal entries against your bank statement to find such errors.
Why Is Monthly Bank Reconciliation Important?
Performing bank reconciliations is one of a company’s best practices. Some people have a casual attitude about their personal finances, figuring that whatever’s in their cash account or bank account will sort itself out eventually. However, in the business world where you’re dealing with clients, retainers, expenditures, investors, marketing, and payroll, you can’t afford to be so informal.
In addition to protecting against theft and fraud, the reconciliation process offers other benefits every month, such as:
- Verifying your cash flow. To ensure that your business turns a profit, you need to track expenses carefully. Those include operating expenses such as rent, utilities, and even bank charges. If your bank service fees are higher now than in the past, it’s worth reviewing how much they’re affecting your cash flow.
- Accurately reporting your taxes. You can take advantage of different deductions on your taxes such as depreciation and work-related travel only if your company’s finances are in order, accurately tallying your expenses.
- Saving you money. Does your office have a recurring subscription for software that you no longer use? Perhaps you signed up for a free trial of a monthly service, then forgot when the trial period ended. Your monthly bank statement is a good reminder of where your money goes.
Let CFO Strategies Perform Your Bank Reconciliation
At CFO Strategies, our experienced group of financial professionals understands how the importance of making sure your company’s financial picture is accurate. We strive to improve the financial health of your business. We are proud to work with all types of businesses as their trusted bookkeeper, accountant, chief financial officer, and adviser.
Let us show you how we can provide the assistance and support you need to keep your business on track and achieve your financial goals. Please call us at (732) 236-4454 or contact us using our online form to arrange for a consultation.