Bank Reconciliations are very important when running a business. The process starts with having a bank account dedicated to your business. At the very least you will have monthly bank charges that are considered a business expense for your business account. When you reconcile the bank account each month you will remember to use the monthly bank fees as an expense on your Cash Flow Report or in your financial reporting software.
To reconcile your bank account you need to enter every bank deposit item into your cash flow statement or financial software. This reconciliation will help you find errors and omissions in your financial reporting. Deposits made from client payments will be cross referenced to your outstanding Accounts Receivable Client Invoices to record any payments made by clients that may not have been recorded at the time payment was received. It’s during the bank reconciliation process that corrections to your financial reporting can be made.
Deposits that are not related to client payments will be recorded to an account where the cash inflow came from. If you have invested cash into the business you will have to determine whether it is a loan to your business or an owner’s equity item on your balance sheet.
When reconciling your bank transactions you may have cash outflows – outgoing payments either by cheque or electronic debit. You can cross reference the payments made to vendors in your Accounts Payable to ensure Invoices and Payments have been recorded. If you have neither an Invoice nor a Payment this is the time to update your records by entering and paying the Invoice. Not all cash outflows are for expenses set up as an Accounts Payable. Some items are journalized in your financial software.
You can record all cash outflows on your Cash Flow Report regardless of how the outflows are set up in your financial system. Once you have accounted for all cash inflows and outflows on your bank statement you should prepare a report detailing your reconciliation. It can be as simple as a copy of your bank statement with each item checked off. For any cheques that have not yet cleared the bank these cheques will be considered outstanding and should be part of your reconciliation, these cheque amounts can be subtracted from your bank balance. For any deposits made but not yet recorded on your bank statement these deposit amounts can be added to your bank balance. These outstanding cheques and deposits will show you what your actual bank balance will be once these items are cleared through your bank.