The Vital Process of Account Reconciliation

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.


Never Stop Assessing the Warning Signs of Trouble

All entrepreneurs are aware that startups fail at a high rate, but they should also remain ever vigilant with evaluating ongoing risk of failure. Pragmatic monitoring of a few key factors is vital to avoiding perils that can sink a business.

Knowing your customers may seem obvious, but too few business owners understand how to accomplish this correctly. You have to truly become aware of why your customers are doing business with you. Know what concerns are on the minds of your audience and how you are addressing those issues. Without this information, you cannot expect to capture and retain customers from your competition. Accounting software can be used for tracking sales patterns and other information about your customers.

Focusing exclusively on your business revenue from customer sales is a fragile exercise. Although your sales total is an important number, you cannot afford to lose sight of everything in your financial information. Your accountant can help you understand trends and conditions as these elements are tethered to successful growth. Most crucial is judicious oversight of cash flow. Responding to an opportunity for higher revenue means knowing how to spend for serving that growing customer base. A frequent necessity is having to implement changes in your spending, create a revised budget, and monitor future results.

Market forces are in constant flux because consumer tastes change and technology changes. The wise entrepreneur gets ahead of these transformations by analysis of developments unveiled within the financial statements of the business. The best entrepreneurs react quickly and hustle into action when spotting the warning signs of trouble.