What is bank reconciliation?
As a small business owner, its important to get bank reconciliation right from the start. Helping you to detect accounting errors and even fraud, bank account reconciliation can ensure you stay on top of your companys finances and understand exactly whats going on in your accounts. Find out everything you need to know with our definitive guide, including how to do bank reconciliation. Bank reconciliation meaning  Bank account reconciliation is an accounting method that can help you match up the data in your accounting/bookkeeping software with your companys bank account, ensuring that they provide the same value on a specific date. If the balances are exactly matched, you can consider your bank account to be reconciled. While bank reconciliation used to be a painstaking manual process that took a considerable amount of time, the rise of cloud accounting software has made bank account reconciliation a much more efficient process, as many of the steps along the way can be automated. Bank reconciliation isnt the only type of reconciliation that your business may need to complete. Theres also vendor reconciliation (where you compare the amounts owed to suppliers to transactions on your payable ledger), customer reconciliation (where you check discrepancies between your accounts receivable ledger and your receivables control account), and intercompany reconciliation (where you produce consolidated accounts for companies which are part of a larger group). However, bank reconciliation is the most commonly used type of reconciliation in accounting. Purpose of bank account reconciliation  There are several reasons why its important to reconcile your companys accounts on a regular basis. Put simply, if you dont implement a bank account reconciliation process, you may not have an accurate sense of how much money your business really has on hand. From double payments and calculation errors to fraudulent transactions, there are a wide range of issues that could potentially compromise the accuracy of your accounting records. Plus, theres a legal component to bank reconciliation too. If youre under/overreporting your sales, HMRC could get involved and trigger a tax inspection. How to do bank reconciliation  Firstly, its important to understand that bank reconciliation shouldnt be a yearly or even a quarterly process. You should be producing bank reconciliation statements once a week, at least. Particularly vigilant companies may consider doing bank reconciliation every day, although if youre a small business with a low volume of transactions, this may not be strictly necessary. Bottom line: the longer you wait to do bank reconciliation, the longer it will take and the more likely it is that therell be errors. Heres how to do bank reconciliation in a little more depth:  Get your bank and business records  Firstly, you need to obtain a bank statement for the period that youre doing a bank reconciliation for. Then, you need to get your accounting records (the relevant documents will be a ledger of income and outgoings) for the same period. Check your opening balance  Now, you should ensure that the opening balance on your bank statement matches up with the opening balance listed on your accounting records. Check your transactions  Next, you need to match the transactions on your businesss accounting records with transactions listed on your bank statement. If at any point you find that an entry doesnt match, its important to explore why this is the case and adjust your accounting records accordingly. Check your closing balance  After youve reconciled all your transactions, you should double-check that the closing balance on your bank statement and your accounting records matches. If it doesnt, you need to return to step three to work out what went wrong. While you can produce your bank reconciliation statement manually, the advent of accounting software means that isnt always necessary. With software like Xero, you can simply arrange for your bank to send your businesss records directly to your chosen software package. Then, when you get around to doing your account reconciliation, corresponding entries will be matched automatically, which is likely to dramatically reduce the amount of time you need to spend on producing bank reconciliation statements. 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.