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The Importance of Bank Reconciliation

Recently, I had a conversation with a friend who is also a business owner. While discussing the merits of maintaining good records for tax purposes, I was astonished to learn that:

1. He doesn’t use any form of accounting tools to enter his revenue and expenses
2. His accountant uses his bank statements to prepare his income taxes at the end of the year

Am I the only one that sees that something is wrong with this process? I found it difficult to believe that an accountant would tell his/her client they only need the company’s bank statements for the year in order to prepare their income tax. But then, this isn’t the first time I’ve heard a business owner say this. Thinking of this conversation is what has led me to write this blog.

You need to understand the importance of reconciling your bank accounts at the end of every month or period.

What does it mean to reconcile your bank account?

Bank reconciliation is the process of bringing your bank account and your ledger Cash account into balance. If you have more than one bank account, a reconciliation is done for each corresponding Cash account. For example, if you have a separate bank account for payroll, there should be a corresponding Cash account in your chart of accounts.

Why is it important to reconcile your bank account?

Reconciling your bank account serves three main purposes:

1. To bring company’s records up to date at the end of each month or period.
2. To verify that the ledger Cash account balance is free of errors.
3. To verify that the transactions posted to the bank account are also free of errors.

What should you look for when reconciling your bank account?

When reconciling your bank account, you should look for:

1. Duplicate or changed checks
2. Unauthorized written checks, withdrawals, or transfers made to your account
3. Data entry errors such as transactions that were incorrectly recorded
4. Incorrect amounts posted to the bank account by bank employees
5. Transactions posted to the wrong bank account

How do you reconcile your bank account?

Reconciling your bank account requires a little bit of time and effort on your part. Simply gather your bank statement, supporting documents such as receipts and invoices, and have your ledger Cash opened in front of you. Compare your bank statement to your ledger Cash account. If you find a discrepancy, use your supporting documentation to determine which posting is correct. Be sure to compare and match each transaction individually for accuracy. Your ledger Cash account balance should match your bank statement balance upon completion of this process.

The same process of reconciling your bank account should also apply to your ledger Credit Card account and your credit card statement.

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