When you reconcile your business bank account, you compare your internal financial records against the records provided to you by your bank. A monthly reconciliation helps you identify any unusual transactions that might be caused by fraud or accounting errors, and the practice can also help you spot inefficiencies.
How Bank Reconciliation Works
To reconcile your accounts, compare your internal record of transactions and balances to your monthly bank statement. Verify each transaction individually, making sure the amounts match perfectly, and note any differences that need more investigation.
Make sure that your bank statements show an ending account balance that agrees with your internal records. If the amounts don’t match, you need an explanation for the difference.
The process can be as formal or informal as you'd like, and some businesses create a bank reconciliation statement to document that they regularly reconcile accounts. If you don't complete the process monthly, you can perform it daily, quarterly, or for any other period you choose.
Where to Gather Information
Your accounting system should contain all of the internal transaction data you need, or you might keep your records in a check register (whether electronic or on paper). Your bank can provide online access to your account, allowing you to view and download transactions regularly for comparison. Some online accounting programs partially automate the process, although you still need to oversee the process.
If you’re familiar with balancing your checkbook, then you’re already familiar with bank reconciliation. You’re essentially doing the same thing for the same reason.
What If Something Doesn’t Match?
It’s normal to see minor differences due to timing, including items that haven't yet cleared the bank, but you should be able to explain those differences easily. For example:
- You might write a check to a vendor and reduce your account balance on internal systems accordingly, but your bank shows a higher balance until the check hits your account. Those checks are known as outstanding checks.
- An automatic electronic payment might clear your account a day before or after the end of the month, and you might have expected to see it in a different month.
When you can easily account for discrepancies, there’s probably no need to worry. When it takes more time to find and reconcile discrepancies, there may be larger issues that need to be addressed.
The Importance of Reconciling
A regular review of your accounts can help you identify problems before they get out of hand.
Business bank accounts receive less protection than consumer accounts under federal law, so it’s especially important for businesses to stop problems quickly. You can’t necessarily count on the bank to cover fraud or errors in your account.
Catch Fraud Before It's Too Late
Signs of fraud should be your priority when reconciling transactions in your bank account. A few things to consider include:
- Were legitimate checks that you issued duplicated or changed, resulting in more money leaving your checking account?
- Were checks issued without authorization?
- Are there unauthorized transfers out of the account, or did anybody make unauthorized cash withdrawals?
- Does the account have any missing deposits?
Prevent Administrative Problems
Reconciling your account also helps you identify internal administrative issues that need attention. For example, you might need to reevaluate how you handle cash flow and accounts receivable, or perhaps change your record-keeping system and the accounting processes you use.
Proper processes for managing your banking transactions result in outcomes such as:
- Knowing how much cash you really have available in your accounts
- Avoiding bounced checks (or failing to make electronic payments) to partners and suppliers
- Avoiding bank fees for insufficient funds or using lines of credit when you don’t really need to
- Knowing if customer payments have bounced or failed, and determining if any action is needed
- Keeping track of your outstanding checks and following up with payees
- Making sure every transaction gets entered into your accounting system properly
- Catching any bank errors
For ideas on how to manage your bank accounts as your business grows, speak with the treasury management department at your bank or credit union.
When Is the Best Time to Reconcile?
It’s wise to review your accounts at least monthly. For high-volume businesses or situations with a higher risk of fraud, you may need to reconcile your bank transactions even more often. Some companies reconcile their bank accounts daily.
You can also build protection into your bank accounts, and your bank can provide useful ideas. For example, many banks offer a solution called Positive Pay, which prevents your bank from approving payments out of your account unless you specifically provide instructions to approve individual payments in advance.