Bank reconciliation predominantly refers to matching your records against the bank registers. A monthly reconciliation ensures that you are aware of any sporadic transactions, which may have taken place without your consent.
The best way to reconcile the accounts is by going through each record individually and matching it with your bank statement. This reconciliation ensures that you have not missed anything and everything has been accounted for. You may see minor differences in the ending balances due to certain outstanding checks or other reasons. Therefore, consider them so that you do not see them as errors.
Why Bank Reconciliation is Important
Reconciling your bank accounts regularly keeps you out of trouble in many ways. You can identify the problems before it is too late as you are constantly monitoring cash flows. It is thought that business accounts do not have the same amount of protection that consumer accounts do. Therefore, you are advised to keep a close eye on these accounts yourself. Here are some reasons that may persuade you to consider reconciliation from time to time.
Catch Fraudulent Activities
One of the critical purposes of reconciling your accounts is to catch potential frauds. If you have issued any legitimate checks, you need to ensure that they are used strictly as you thought they were to be used, and there are no duplications or alterations. If there has been unauthorized access to your account, you need to know before something harms you.
Prevent Complications
The bank reconciliation process is also helpful in identifying any potential hazards or problems in time. Sometimes, your cash flows are down, or you are having trouble recovering the accounts receivables. In such situations, reconciling everything can guide you in the right direction by identifying the problem source. Once the problem is identified, you can take measures to fix it and, along with that, fix your cash flows and receivables. It also helps you develop a bookkeeping system that is free of errors and more efficient.
Along with assisting you in identifying the balances in all of your accounts, bank reconciliation helps you avoid bank fees due to insufficient funds. It saves you from opening too many lines of credit when you don’t need them. You can keep track of outstanding checks and see if any payments by your customers have bounced.
When Should You Reconcile?
There is no fixed time to reconcile your bank accounts, as you can do it anytime you want, depending on your preference. However, it is recommended to reconcile all of your accounts at least once a month so that you have an accurate picture of your current standing as a business or individual. Some high-volume companies even reconcile every week as they are involved in many daily transactions, which can pile up if they wait an entire month.
You can also use Positive Pay for bank reconciliation. This means that any payment in or out of your account must be notified to them in advance. This helps save you from any fraudulent activities.
How to Reconcile
It does not matter whether you take a formal or informal approach to reconciliation, as the primary purpose is to match each transaction with your accounts balances. You will have to closely inspect your records and the bank records and compare the balances at the end of a self-defined accounting period.
Your bookkeeping system is essential in this regard because, if it’s properly managed, you will be able to match everything without much hindrance. However, bank reconciliation can become an arduous task if you do not have a well-maintained accounting system. Automating and integrating your accounting system with the bank can ease the whole process as you can have access to updated records at all times.
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