While they might seem intimidating, bank reconciliations are an invaluable tool for bolstering the precision and dependability of your financial records. This process empowers you to maintain the accuracy and reliability of your capital, which can provide you with a clear and accurate picture of your business health.
Through a systematic approach and the right set of practices, you can become an expert at this task. Here we explain what is bank reconciliation and how to balance your bank statements in 7 easy steps.
What is Bank Reconciliation?
Bank reconciliation represents a pivotal process in your small business’s financial management. At its core, it involves matching your internal financial records with the statements provided by your bank. By meticulously comparing these two data sources, you can reveal, address, and prevent discrepancies that might otherwise impact your business’s standing, such as accounting errors or fraudulent transactions.
Having up-to-date financial statements is not just about complying with regulations or preparing for tax season. It’s about simplifying your cash flow management, enabling you to make informed decisions and plan strategically for growth.
Here are 7 easy steps to balance your bank statement and maintain the financial health of your business.
1. Gather Your Records
Before reconciling, you must have all your ducks in a row. Start by assembling the relevant records, such as your bank statement and internal documents, including your general ledger or accounting software records.
2. Check Starting Balances
Beginning with the opening balance, compare your bank statement and internal records to spot any discrepancies. Common differences might stem from outstanding checks, deposits in transit, bank fees and charges, interest income, and electronic transactions.
If the starting balances do not align, this indicates a discrepancy that needs immediate attention. It is crucial to identify and correct these issues to ensure accuracy in your financial statements.
3. Match Transactions
Methodically review each transaction listed on your bank statement, and match it with its counterpart in your accounting records. Verify the amounts and dates of each transaction and confirm the payees’ details; this step helps ensure that each payment has reached its intended recipient.
4. Document Discrepancies
If you encounter any transactions that don’t match, document these inconsistencies. Make a note of the transaction details, as this will serve as a roadmap in your investigation into the root cause of the discrepancy and assist in ensuring that any accounting errors or issues are effectively resolved.
5. Rectify Errors
For each discrepancy, it is important to investigate further to uncover its underlying cause. This process could lead you to discover input errors in your accounting records or late transactions due to processing delays.
Once you’ve identified the error, proceed to fix it promptly. This may involve correcting an input mistake in your records, following up on a delayed transaction, or contacting your bank to resolve the issue. Swiftly addressing these discrepancies ensures your financial records remain reliable.
6. Update Records
Updating your financial records may involve actions based on your resolved discrepancies. You should mark certain transactions as cleared, indicating they have been processed and reconciled.
For example, you might discover missed transactions in your original entries. Therefore, you must input the new transactions into your accounting records and update your ledger. You are laying a solid foundation for your financial management by carefully keeping these records updated.
7. Confirm Final Balances
Finally, after all the adjustments have been made, take a moment to compare the ending balance of your accounting records with the final balance on your bank statement. This crucial step ensures that all transactions have been accounted for and all discrepancies resolved. If these two figures align, you can be confident in the accuracy of your records.
Performing bank reconciliations is a critical component of maintaining accurate financial records and ensuring your business’s money outlook. By following a step-by-step approach, you can streamline the process and improve your economic control.
Regular reconciliations not only help identify errors and detect fraud but also ensure compliance and support better decision-making. As a business owner or finance professional, mastering this art is an essential skill that will benefit your organization in the long run.
How FINSYNC Can Help
FINSYNC allows you to run your business on One Platform. You can send and receive payments, process payroll, automate accounting, and manage cash flow. To learn more about how we can help your business start, scale, and succeed, contact us today.