Category: business

Figuring out exactly how much money is really available in your business bank account can be a frustrating attempt to hit a moving target. Just when you think you know it, something else pops up. Although the advent of online banking makes balancing your books is a bit easier, a monthly bank reconciliation is necessary. It’s the only way to figure out the difference between the balance in your bookkeeping and your bank balance.

Some small business owners think don’t see the need to do bank reconciliations because they look at their bank balance online. They get banking alerts on their smartphone. They downloaded all banking apps. However, they still may not know what’s going on.

Even though the banks offer “real time” bank balances, it is not the whole picture. Since some transactions are posted in the afternoon (i.e. deposits), they usually don’t appear until the next day whereas debit card transactions at a store or restaurant are immediate can show up any time of day. For online purchases, the approval may happen right away, but you may not be billed until the item is shipped. Online banking sites use the terminology like “pending transactions” and “uncollected amounts”. These transactions have yet to be cleared and yet to hit the bank.

As a bookkeeper, I honestly have not enjoyed doing bank reconciliations. It is often very time-consuming especially if the transactions are only entered once a month. However, once I have completed the bank reconciliation, I can give clients practical advice on how to manage their cash flow, their budget and/or burn rate. It the best way to anticipate profitability on a monthly basis.

A small business, especially a retail business, has cash inflows and outflows daily. Those are recorded in your bookkeeping. Whether you are maintaining the books via a paper general ledger, a spreadsheet, or accounting software, you have to reconcile to the bank statement. It is best practice to reconcile monthly. When reconciling the bank statement, the balance per books is the balance of the Cash account in the general ledger that pertains to the bank account. Resolving the difference between the balance per book and the balance per bank is what a bank reconciliation. It is not a math problem. It is more like a scale. The goal is to have the same amounts on both sides. Accuracy, completeness, and timeliness are the three things that may cause the unbalance.

Accuracy. Banks do make errors, but typically the data from the bank statement is correct. There’s less of a chance of error. However, the data entered into the accounting system may have been entered manually. It’s so common to transpose numbers and that can cause an unbalance.

Completeness means having ALL of the data. A monthly bank reconciliation should include all transactions for the whole month. For example, a September bank reconciliation has to include from December 1st through the end of December 30th.

Timeliness. Most of the differences between the bank and the book are due to pending transactions. It is good practice to make deposits as soon as you can so that they clear at the bank right away.

Whether you use Quickbooks, Xero or a Google Sheets, it is very important to do monthly bank reconciliations.

The bottom line is that bank reconciliations are important. They give a balanced view of a business’ operating cash flow.