What is a bank reconciliation and why you should be doing one?

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Either through a lack of time or dislike of bookkeeping chores many small business owners take cursory glances at their bank statements each week or month to confirm that the “mental tally” looks about right and fail to spend the time performing detailed bank reconciliations. This blog briefly explains why you should all be doing one.

What is a bank reconciliation?

Bank reconciliations are an important procedure that match the cash balance of the bank to the balance found on the company’s financial records. It is normal for a company’s cash book balance as per accounting records to differ from the balance per the bank statement due to timing differences. Such timing differences appear as reconciling items in the bank reconciliation statement. The purpose of the bank reconciliation is to detect discrepancies besides those due to normal timing differences.

Why should you be doing one?

1 – To highlights errors in your accounting records – such as transactions you may have forgotten to post or items that you have posted incorrectly

2 – Identify bank errors – such errors may be transposition errors, duplicate transactions or simply the correct amount posted but to the wrong account.

3 – Prevent overdrafts – the timing between your cash outflows and cash inflows can vary considerably. This is particularly relevant when your company is operating on very low cash reserves. Regular bank reconciliations can help you postpone payments that would result in overdrafts and bounced cheques.

4. To improve debt collection – you will be alerted to customers cheques not clearing

5 – Credibility and completeness of your accounting records – bank statements are an independent source of data and by checking your records against them helps to ensure your cash book figures are both credible and complete

How frequently should they be done?

Bank reconciliations are typically a month-end procedure but companies with smaller cash resources should perform them more regularly.

Which method?

Bank reconciliations can be performed either manually using an excel spread sheet or alternatively a better more efficient option would be using accounting software. Even the most basic packages have bank reconciliation modules which provide you with a final statement of unreconciled items.

Don’t forget….

to sort out the unreconciled items on a timely basis. I have come across some clients using software who believe the bank reconciliation job is complete when the process of matching bank transactions to cash book transactions is finished. This is only half the job done – make sure all unreconciled items are followed up and acted upon immediately.

Cash is the most vulnerable asset of your business and bank reconciliations are a key control helping to protect your cash through uncovering errors and irregularities. In short they are vital for any small business.

If any one would like any further advice or assistance on any of the above please give us a call – 07596 516670

Karen Upcraft

Director and owner of The Winchester Bookkeeping Company

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