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Finance Forward Blog

Bank Reconciliation 101

Bank Reconciliation 101

Anyone who's spent time dealing with banks and business accounts has heard of bank reconciliations. The process of reconciliation of your company's financial records is fundamental to your business' success.

Failing to perform accurate bank reconciliations can land you in an undesirable place. In extreme cases, you could end up being charged for tax fraud. In milder cases, your company may end up paying extra taxes from its own pocket. We'll explore why later in this article.

We will also go over the fundamentals of bank reconciliation and why it's crucial for small businesses. So, if you're ready to explore more about this prime accounting topic, let's dive right in!

What Is Bank Reconciliation?

In the world of accounting, reconciliation refers to a particular process performed to acknowledge any potential differences between two sets of records.

Both data sets are independently checked and then verified against one another. If both records show the same results after being thoroughly reviewed, they can be classified as valid and reliable.

Reconciliation practices typically concern two data sets: the amount of money entering a bank account and an internal record for company earnings. Though these data sets sound similar, they are recorded independently of each other. One financial record is maintained by the bank (in the company’s account history). The second record is maintained by the business owner themselves, or by the company’s accounting department.

Sometimes, business owners prefer checking company expenditure against the amount spent from the company bank account instead. This is an acceptable method of checking, too.

For most companies, these data sets are limited to the numbers crunched during a single fiscal year. However, this doesn’t mean you should only be checking your company’s financial statements at the end of your fiscal year. Instead, you should try and perform regular reconciliations whenever feasible.

When to Perform a Bank Reconciliation

Some businesses prefer performing a bank reconciliation every month, while others like to do it every three months (quarterly basis). Either method is acceptable, though ideally, companies should reconcile their cash flow data every month for best results.

Delaying bank reconciliation has potential adverse side effects. For example, it is significantly more challenging to overcome disruptions in your financial data if the data is too old.

Ideally, transaction-related issues should be addressed as soon as possible. Unfortunately, the longer you delay it, the less likely it is you’ll be able to find a solid solution to the problem. This is because such issues usually arise as a result of fraudulent activity.

For example, a client may have provided you with a check, but the check may have bounced. In that case, you may have logged the receiving of payment into your cash inflow datasheet without actually receiving the money.

Some financial data sets may contain simple typos, too. However, if not addressed immediately, these typos can add up and present inaccurate financial records at the end of the fiscal year.

Benefits of Performing Regular Bank Reconciliations

Below is a detailed list of reasons explaining why bank reconciliations are essential:

  • Cross-checking financial statements with your bank and internal accounting department (company-based) can help spot and eliminate accounting errors. There’s always a chance of human error – after all, accountants are just people, too!
  • Make tax planning and reporting easier by regularly cross-checking your bank and company’s financial records. Generating an accurate tax return is directly dependent upon how reliable your bank statements are. Suppose you fail to produce a precise bank statement due to poor reconciliation practices. In that case, you may either be charged for fraud (for failing to pay the correct tax amount), or end up paying higher taxes than required.
  • Account for lost checks by performing regular bank reconciliations. If the numbers from your bank’s financial records don’t match the ones produced by your company, there’s definitely something fishy going on. Luckily, performing a thorough reconciliation can help you weed out lost or bounced checks. Then, you can track these checks and get back the money you’re owed!

Or, you may have received extra money due to a check entry error. If that’s the case, you may have to pay your bank back. It helps to know these things in advance, though. For example, suppose you find you owe the bank $500 but can’t afford it at the moment. As long as you perform regular reconciliations, you’ll gain awareness about pending payments well before their deadlines. Then, you can comfortably arrange the money on your schedule without feeling pressed for time.

  • Performing monthly reconciliations can help you acknowledge and account for bank charges and interest rates changes. By reviewing your finances regularly, you’ll gain a clearer idea of how much money you owe your bank. You’ll also be able to tell if this amount has changed due to policy updates or a hike in interest rates. Awareness of such changes can help you plan your financial future accordingly, ultimately helping you steer clear of high debt or penalties.
  • Detection of fraud becomes significantly easier when you conduct regular bank reconciliations. As noted previously in this article, the sooner you detect fraud, the easier it will be to overcome it.
  • Tracking receivables becomes easier when financial data is tallied and rechecked regularly. Sometimes, money may be promised to you but won’t enter your bank account till a later date. In some cases, this “later date” is part of the upcoming month’s financial records. In that case, despite entering it into your company’s current month’s logbook, the money isn’t actually with you yet.

It’s always helpful to know exactly how much money is within your business’ bank account at any given time. Regularly checking with your bank to see if all the money you’re expecting has come in can help you stay on top of things. However, if you fail to account for time-based differences in the amount of money received in your account, things could get tricky. You may think you have a certain amount safe in your bank, but in truth, it has not yet reached your account. Luckily, if you cross-check your data and perform regular reconciliations, this won’t be a problem.

Frequently Asked Questions (F.A.Q.)

Below is a collection of common concerns (and answers!) related to bank reconciliation:

How often should I perform bank reconciliation?

Ideally, you should perform bank reconciliations every month. This will help you gain an accurate image of where your business’ (or personal) accounts currently stand. It can also give you valuable insight into which direction your finances are heading, allowing you to make smarter financial decisions.

Performing a bank reconciliation each month also makes it easier to tally your progress at the end of a fiscal year.

What is a fiscal period in accounting?

A standard fiscal period is 12-months (one year) long. Fiscal years exist to help better organize a business’ financial history. So, for example, if a company has been in operation since April 2019, it has successfully completed three fiscal years and is currently on its fourth (as per January 2023).

Each fiscal year’s financial data is recorded independently and must not overlap with past or future years. The business must note its complete transaction history during the fiscal year and perform regular bank reconciliations for it. Tax money payments are also made per fiscal year.

Note that fiscal years can start in any month and are not limited to the 1st January to 31st December cycle. In fact, a year-long accounting period ending on 31st December is called a ‘calendar year’ and not a fiscal year.

Are bank reconciliations important for small businesses?

Yes. Bank reconciliations are important for businesses of all scales.

Remember, performing regular bank reconciliations helps ensure your business’ transaction history is correct. Regardless of how large or small your company is, it’s guaranteed to have a steady inflow and outflow of cash. Hence, it’s sensible to double-check your records to ensure your financial history is accurate and reliable, even if you’re a small business owner.

What are the different methods of bank reconciliation?

There are two fundamental approaches to bank reconciliation: documentation review and analytics review. Both are equally valid and accurate.

Final Thoughts

By now, it should be evident as to why bank reconciliations are so important for small and large businesses alike. In addition to affecting your tax payments, reconciliations can influence your business’ financial future. So, you should take care to perform timely reconciliations without any hesitancy.

Of course, accurately performing a bank reconciliation takes time and requires careful attention to detail. Thus, most business owners prefer to hire a professional CPA or private bookkeeping accounting expert to cross-check their financial records. If you’re not used to performing bank reconciliations, don’t put your company’s financial future at risk by attempting to audit the data yourself. Instead, consider hiring an expert accountant to deal with the tedious task of editing your business’ financial statements. Doing so may cost you a few extra bucks but will help you steer clear of fraud, tax evasion, and third-party theft. Get started by taking advantage of a free consultation call with tax experts at J. Hall & Company.