Bank Reconciliation – A Quick Overview

Bank reconciliation statement

Why is bank reconciliation necessary?

Every business in the modern world uses a bank account to receive the majority of their income as well as pay a large part of their business expenses through the bank. Bank reconciliation is a vital part of an accounting system, because it reconciles and explains any differences between the accounting records of a business and transaction details contained the bank statement. Whether you do your own bookkeeping or you employ the services of a bookkeeper, preparing periodic bank reconciliations should be an intrinsic part of running your business. It is a fundamental part of keeping an eye on what’s going on within a business.

Generally a Small Business will include a cash account in their overall ledger that monitors each of the transactions within the business enterprise.   These include income from clients, payments made for company expenditures, and such. Where the business has a bank account, the bank will record its day to day activities in the bank account in a bank statement. At the conclusion of every month, the bank will draw a line at the bottom of the list of business activities and email a bank statement to the business owners.   This should contain every detail for each of the transactions for this account, together with the overall balance at the end of the period.

Compare bank statement to general ledger

When the company receives its own bank statement, the individual responsible for the accounting should inspect the data and compare it to the documents stored in the cash account of their general ledger. This can help to affirm that all the information is in order, and also to discover any possible issues.  Taking the opportunity to reconcile a bank statement is essential in making sure that the information the bank has on the small business account is in accord with the business documents. 

Bank reconciliation can be time consuming

Since many companies have a high number of transactions every month, the practice of reconciling the bank statement sometimes takes a little bit of time.   Furthermore, this may be a somewhat complex matter, since there could be things that show up in the ledger which haven’t yet emerged on the bank statement.   By way of an example, if a cheque was written from the business account at the close of the month, it is possible for that cheque not to clear the bank account before the next month.   Another example might be if the bank reduces the amount of a company’s accounts without notifying the business owners.   This might be associated with a fee on a bounced cheque, or some other kind of miscellaneous charge.   A small discrepancy like this one may give rise to a difference between the company’s ledger and bank statement. Both documents might have to be corrected so as to reflect accurate balances. 

Reconcile the bank account

When you have looked over all of the figures and found where the differences are, you should find that you are able to correct the balance or balances, and that the numbers now agree. It is then that your bank statement will be correctly reconciled.

Accountants for small businesses

Do you need help with accounting and / or tax for your business? We may be able to help. Call or e mail us with details of your requirement and we will do our best to provide a solution. Here at Alexander Ene we pride ourselves in providing excellent accounting service for small businesses at affordable rates.

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