Everyone makes mistakes, especially when confronted with the labyrinth of bookkeeping entries, but catastrophe is avoidable by deploying a common process for locating and correcting errors or omissions. Reconciliation of bookkeeping entries to bank records assures that your books contain all the transactions that occurred in the account. Moreover, reconciling uncovers other crucial elements that demand scrutiny.
Fortunately, accounting software has made the reconciliation process a simple task. But the automated nature of this procedure commonly results in failure to diagnose and resolve questionable bookkeeping issues.
What and When of Account Reconciling
Reconciling to a bank statement should be conducted every month. Reconcile every account, including all checking or other bank accounts as well as credit cards and loans. Transactions you’ve recorded in your bookkeeping for a specific account will appear on a statement from the financial institution for the same account.
You’ll know that your records are accurate when the account balance on your books agrees with the bank. This happens by matching the transactions according to the bank statement with identical transactions you’ve recorded for that account on your books.
Agreeing with the bank statement doesn’t mean you will necessarily have the same account balance as the bank. You may have some outstanding checks that have not yet cleared the bank and won’t show up on the account statement. The bank doesn’t know about these checks.
Similarly, some electronic transfers you’ve recorded in your bookkeeping may have taken place at the bank a day or two after the bank statement. Reconciliation is all about bringing into the open these outstanding transactions.
Why and How of Account Reconciling
A part of the reconciliation journey is the discovery of transactions recorded by the bank that you have previously omitted from your bookkeeping. Moreover, uncovering non-reconciled items is particularly important. Some checks you’ve written may have never been cashed. You don’t want to simply delete them from your bookkeeping.
These expenditures may have already been deducted on income tax returns or reported to lenders. Adjustments are required on your current financial statements to correct prior period changes. An accounting professional will assure accurate accomplishment of this step.
Outstanding deposits from many days prior to the bank statement’s ending date are indicative of obvious mistakes. If you really made the deposit, it will appear on the bank statement. Your business sales are overstated if you entered deposits that never really arrived at the bank.
Reconciliation also reveals bank encoding errors and fraudulent activity. Contact your bank immediately if you notice any of these problems.
Duplicated entries are another cause of reconciliation discrepancies. Bookkeeping is a double-entry system. Recording a bank account transaction for payment to a credit card accomplishes both sides of the same event. This single entry is reconciled with both the bank account and credit card reconciliations.
Likewise, entering a deposit of borrowed money simultaneously records the loan. Obtaining a loan history from a lender permits seeing if your books agree with the lender’s information.
Assure that all loan payments from the bank account are applied to both the loan account and interest expense.