You know these bank statements you get every month? The ones you sometimes don’t even bother looking at, or even worse – throw out? Well, as a business owner, you really should look at them (in detail) and save them. Here’s why.
What are bank reconciliations?
Bank reconciliations are just another one of the monthly steps you have to take when you do month-end closing. This means that using your monthly bank statement, you must go line by line and itemize each transaction. What was it for? What’s its nature? Each line needs to be recorded in the books appropriately. For example: when a monthly loan payment of $1500 was charged to your account, you would have to create the following transaction –
Debit
Liabilities (loan account) – principal portion - $1450
Interest charges (P&L) – interest portion - $50
Credit
Cash – entire charge amount - $1500
After all the transactions have been recorded on the system (i.e.: your books), it’s time to ‘reconcile’. That’s the final step to ensure that the beginning balance in the account + deposits – charges – outstanding cheques = closing balance. If it doesn’t reconcile, then you’d have to go back and check why. Did you miss one of the transactions or is there another problem?
Why do we bother?
Some of the reasons we ‘bother’ with doing bank reconciliations are these:
a) You can’t really properly close your books at month-end without it. Why? Because then you’re not able to present the real financial picture. Think about it this way: your cash balance on the statements shows, for example, $150,000, meanwhile you’ve got $120,000 worth of outstanding cheques that have not been cashed yet. So the question is, do you really have $150,000 in cash or is it actually only $30,000?
b) Find mistakes – this is one of the easiest ways to find mistakes. Either caused by you, the user (i.e.: wrong journal entry) or maybe the bank charged wrong fees
c) Detect fraud – reconciling all the transfers and cheques that have left your account is one of the best ways to detect fraud. Employers run into disgruntled employees all the time and if they know how to manipulate the system, some could unfortunately take advantage of it and pay themselves a nice bonus without your knowledge
d) Negotiate banking terms (charges) – do you know exactly how much your bank charges you for all your monthly activities? Completing the reconciliations would give you the answer. This can also be used as a tool to negotiate better terms when compared to what other banks have to offer business customers
In conclusion, next time you get these statements, don’t ignore them. You must provide them to your bookkeeper / accountant. To learn more about what your business needs to do, schedule a brief consultation meeting today.
Comentários