Accounting Management tips

Why and how to perform a bank reconciliation?

The bank reconciliation consists in comparing your internal statements with the statements provided by your bank. It is a verification and control method to identify inaccuracies or fraudulent transactions that could affect your daily financial operations and the smooth functioning of your business.

We have to admit that the words “bank reconciliation” are not the most inspiring. It may not be the most pleasant task, but by reconciling your accounts, you protect your business from all sorts of problems (fraud, errors, etc.). Therefore, it is important that you not skip this step.

Make yourself comfortable. Together we are going to explore the world of bank reconciliation: how it works, why it's necessary and the various ways of going about it.

Bank reconciliation

To reconcile your accounts, you must compare the transactions entered in your accounting registers (general ledger, account statements, schedules, etc.) with the transaction statement provided by your financial institution. Each transaction must be checked in order to ensure that it perfectly matches the one on your bank statement and that there are no differences in your numbers to investigate.

It is normal for the balance between the accounting general ledger and the bank statement to differ when you perform the check. For example, if you noted a payment to a supplier and the supplier still has not cashed your cheque, you will see a justified difference between your two statements.

A discrepancy between your two documents can also occur when you are expecting an electronic funds transfer before the end of the month and it only arrives at the beginning of the next month. These discrepancies are normal, until you can easily identify the cause.

How to perform a bank reconciliation

There are two ways to proceed. You can perform the bank reconciliation manually on paper, by comparing the transactions from the two sources one by one.

However, it is faster and easier to do it with your accounting software by importing your bank statements to compare them with the data from your software, which contains a report of all your banking operations for a given period (one week, one month, etc.).

ocumenting the results of your reconciliations can also be useful. You can note your observations and everything that you want to monitor over your next few reconciliations. This also allows you to ensure a compliant and consistent procedure in the event of a staff change in your business.

Why it is important to reconcile

Performing a regular and adequate bank reconciliation allows you to verify if the balance of your account is accurate and to detect mistakes before they become too big.

It is essential to regularly check the consistency between your bank statements and the general ledger, in order to:

  • Find and correct mistakes
  • Prove the accuracy of the balance of your business account
  • Monitor the health of your business
  • Follow your profitability, keep up-to-date in account statements
  • Monitor unusual activities and fraud

When should you perform a bank reconciliation?

The recommended frequency varies according to the volume of transactions. For a business with a large volume of transactions, the bank reconciliation should ideally be performed each week to ensure a proper follow-up of its fund entries and disbursements. Some businesses even do it every day!

When?

For a lower volume of transactions, the reconciliation can be performed once a month, if a weekly frequency is not realistic for you. However, keep in mind the fact that the longer you wait between reconciliations, the longer and more tedious it will be, because you will have many more transactions to check.

In case of doubt, discuss it with your accountant. Your accountant can advise you on the best frequency for you and will likely be thrilled to know that you are concerned about the accuracy of your numbers.

Choose the right tools for the job!

The bank reconciliation is just one of the many management and accounting operations that you must take care of in a business. To make the job easier and more efficient, obtain a management solution that adapts to your needs and allows you to focus on your goals!

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