Ahh.. bank reconciliation. Everyone knows they are supposed to do it, some people do and fewer people know what they are doing. And no… Quickbook’s reconciliation module/report doesn’t really count.
Well, here’s my shot at demystifying it for all you entrepreneurs out there…
What is bank reconciliation?
The purpose of a bank reconciliation is to identify all the transactions that make up the difference between your bank balance per your bank statement (the number shown on your bank statement), and your bank balance per book (the number that appears in your accounting software.)
By identifying the differences, we are able to identify the transactions that are considered “outstanding” (ie. recorded by one party but not the other.) But why do we do it? Here are a few reasons:
By comparing the records prepared by the bank (bank statement) and records prepared by us (accounting software,) we can make sure that there are no mistakes made by either party (I know, shocking right? but believe us, banks do make mistakes)
By identifying transactions that were recorded by the bank and not by us, we can a) verify that they are valid and b) if they are valid, adjust our books accordingly so our financial reports can reflect the true state of our financial health
3. Identify possible issue
By identifying transactions that were recorded by us but hasn’t been reflected in the bank records, we can identify possible issues and follow up accordingly (ie. if a check was cut 6 months ago by us but it hasn’t cleared the bank yet, we should probably find out why – maybe the check was lost in the mail, maybe the vendor forgot to deposit the check, etc.)
4. Save time for auditing
Bank reconciliations allow your auditors to easily confirm your cash balance and document any differences during an audit (as a former auditor, please please please don’t just print out a “bank reconciliation report” from QB and call it a day… that report is pretty useless to auditors and will cost you time and money to have us format or re-request it)
I’m hoping this is relatively straightforward but please don’t be shy with questions and/or tips that you’ve found helpful in the comment area 🙂