As a small business owner, your cash account financial records need to match your bank statement information. To ensure this, you’ll need to get a bank reconciliation statement, which outlines your withdrawals, deposits, and other activities within a certain period.
The statement helps identify differences between book balance and bank balance, allowing you to make the necessary corrections or adjustments.
What is Bank Reconciliation?
Bank reconciliation is the process of comparing your sales and expense records against your bank account’s statement. It allows you to verify your financial records and prevent fraud. It confirms all processed payments and the deposits that were made to your account.
Completing the reconciliation statement requires using both the previous and current months’ statements. You should also check your closing balance of the account. Bear in mind that the transactions on the statement date are also important.
Your General Ledger vs. Bank Statement
During the bank reconciliation process, the two most important documents are the general ledger and bank statement. Both show the transactions of your business.
A general ledger, also known as a nominal ledger, is where the accounting data from sub-ledgers and journals are posted. It’s used to store, sort, and summarize business transactions.
During reconciliation, individual accounts within the ledger are reviewed to ensure the source documents match the accounts’ balances. Once this step is completed, the balance figures of the ledger are reviewed against the bank statement.
Initially, it’s possible to find errors and unmatching figures. It’s the responsibility of your accountant to note the errors and fix them. In the end, the balances of the statement and ledger much match. This is important to ensure the ledger is in a reportable condition.
- General Ledger –
As noted before, the general ledger is a record-keeping system for business transactions. It provides records of every transaction of a business during its lifetime. Its data is essential in preparing financial statements for your business.
The records are put in different categories, including expenses, revenues, liabilities, owners’ equity, and assets. First, the records are recorded in individual sub-ledger accounts before being summarized to the general ledger.
- Bank Statement –
Also known as an account statement, a bank statement shows all your business transactions within a given month. Banks usually give one free statement every month. If you need to review it again, you’ll need to pay a fee first. The statement includes the account information and the details of every withdrawal and deposit.
During a bank reconciliation process, there are several steps you should take.
- Gather Bank and Business Records –
You’ll need to request your bank statement from your bank. This can be done online or by visiting any local branch. If you have a credit card account and a checking or savings account, you’ll need all statements. Also, ensure you have your business records—some businesses use Excel, spreadsheets, or software to keep their records.
- Compare Deposits –
Compare your deposits, starting from the last time your account records matched. Each deposit must be recorded as income on your account. If there’s missing information, be sure to identify it and enter it where it should be.
- Make Adjustments –
Once you have reviewed and compared your deposits, withdrawals, and revenues, be sure to note all errors, fees, and interest earned. You’ll need to make the necessary adjustments and corrections to fix the errors. Adjustments are made to your books to reach the actual balance.
- Compare Final Balances –
The final step of the process is to compare the balances—they should be the same. Your business bank balance should match your business account’s total figure. Note that this will be the starting point for your next reconciliation process.
- Keep Records of Everything –
Be sure to keep records of the entire process, particularly if you made corrections and adjustments. Using a software program or application makes it easy to keep the records and complete the whole process.
Find a Financial Professional
If you’re not familiar with business financials, the process can be somewhat involved. Identifying missing information and tracking it down needs an expert eye. Make sure your business follows bank reconciliation accounting best practices by hiring a CPA. The accountant will prepare the statement on your behalf.
Take Care of Your Business Finance
Completing a bank reconciliation statement is important to ensure accurate financial records of your business. You need to complete the process at regular intervals to know your balances. Otherwise, you risk having low cash balances, resulting in overdraft fees and bounced checks.