What Is Bank Reconciliation?
Helping to alert you to fraud, lower your tax, and keep your bookkeeping in order, bank reconciliation is an essential process for small businesses to master. Find out more about this crucial accounting process with our definitive guide. Put simply, bank reconciliation is the process by which you can ensure that the information held in your businesss accounting record matches up with the information in your businesss bank account. When the two figures are exactly matched, you will have reconciled your bank account. However, if the figures dont match, then the bank account is considered to be unreconciled. Its a good idea to do a bank reconciliation every time you receive a statement from the bank. If your business handles a large number of transactions, this could be at the end of every day. More commonly, bank reconciliation is conducted at the end of the week or month. How to do bank reconciliation  To do a bank reconciliation, youll need to match the cash balances on your business' balance sheet with the corresponding amounts in your bank account. Then, by determining whether there are any differences between the two, you can make changes to your records, identify any potentially fraudulent transactions, and eliminate discrepancies. Heres our step by step guide for how to do bank reconciliation:  Obtain your bank records  First up, youll need to get a record of transactions from the bank. You can find this on your bank statement, through online banking, or by asking the bank to send this data directly to your accounting software. Get your business records  Then, you need to get your business records (a ledger of income and outgoings). This is likely to be in a spreadsheet, in your accounting software, or a logbook. Look at your deposits  Now, youll need to match the deposits in your records with the transactions listed on your bank statement, making sure that each deposit is listed in your accounts as income. Check your income  Every entry in your books should match up with a deposit on your bank statement. If an entry isnt accounted for, its important to find out why. View your withdrawals  Next, you should check that all your withdrawals are recorded in your books. This should include the obvious expenses, such as rent and payroll, as well as things you may not yet have accounted for, such as bank fees. Check your expenses  Now, you need to ensure that all of your expenses match up with a withdrawal listed on your bank statement. There may be a wide range of reasons why your expenses arent listed on your account, such as payments not clearing in time or being made from a different account. Reconcile the accounts  Finally, after all withdrawals and deposits have been checked, the total balance on your bank statement should match up with the total listed in your business accounts. When it comes time to do another bank reconciliation, you can use this as the starting point. There are a number of benefits associated with conducting a bank reconciliation. Most importantly, getting bank reconciliation wrong may mean that youve got an inaccurate view of the amount of money in your bank account. By detecting missed payments, calculation errors, and double payments, you can ensure that it doesnt look like youre underreporting your sales  something that could lead to a tax inspection from HMRC. In addition, bank reconciliation can help you spot fraudulent transactions and theft, while its also an effective means of keeping track of accounts payable and accounts receivable. There are a broad range of bank reconciliation tools and software packages that you can use to make the entire process a little easier and reduce errors. For example, if youre using Xero, most banks can simply send transaction data directly to your accounting software through a secure connection. Then, when its time to do your bank reconciliation, the software will pull up each transaction and suggest matches with corresponding entries. We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.