The most important step an entrepreneur can take to ensure all revenue and expenses are recorded in the books is a reconciliation of the bookkeeping to bank records. Unexplained discrepancies between the cash balance on the books and the bank statements are a by-product of missing or inaccurate financial information. The result is questionable recorded profit.
After the prior year’s end, it is ideal to uncover legitimate reasons for the books to differ from a bank statement. A bank account on the balance sheet of your business from last month may show a different amount than last month’s bank statement. Some checks you’ve written may be outstanding, or deposits on the final day of the month might have been unprocessed when the bank statement was produced.
The reconciliation process locates previously missing transactions, such as bank charges, electronic remittances, and unrecorded deposits. But a business owner must scrutinize the reconciliation report to determine if further adjustments are needed.
Checks written long ago that have not yet cleared your bank account are known as stale checks. Any of these outstanding checks from more than a year ago should be removed from the business books with a journal entry dated in the current year. The business has ultimately not incurred these costs since the money never left the bank account.
The only deposits that should be missing from the bank statement are those you made at the end of the statement period. Older unreconciled deposits are indicative of errors or duplications and should be investigated.
Maintaining these current reconciliations will put you in a good position to start the year on solid financial footing.