The oh so dreaded bank reconciliation.

Everyone seems to hate doing them, from accountants to business owners. I actually think they’re fun, I don’t know what that says about me but it’s true. I love to bring order, I love clicking that final “reconcile” button and everything is in happy accounting harmony land. I don’t even generally mind the especially challenging reconciliations where nothing seems to be going right. Because when you finally figure it all out and it works there is almost a palpable sense of accomplishment.

If you are new to business then you may have absolutely no idea what I am talking about just yet. Don’t worry, I’ll give you the crash course in bank reconciliations.

Step 1

A bank reconciliation is completed at the end of the month once you receive your statement from your bank or credit card company. The first thing you need to do is actually open that envelope or e-mail and LOOK at the statement. I want you to resist the temptation of tucking it somewhere into the void of paperwork wasteland never to return or be heard from again.

Step 2

Now that you have your eyes on it and in front of you the next step is to make sure that you have copies of all of your invoices and receipts that were paid from this account for this period of time. Is there a payment that you don’t have the receipt for? Make a note of it and set a reminder to get a copy. Is there a strange charge? Here is where you will identify potentially fraudulent charges. Another common scenario is that you might see payments for a subscription service that you have previously cancelled or a “double dip” (and I don’t mean of the doughnut persuasion).

You only have a narrow window, (30 days) to dispute any suspicious transactions which is why it is vital that you stay on top of your statements.  After that the likelihood that you are left holding the bag greatly increases.

Step 3

Review the status of the cheques you have written. We may be in the 21st century but there are still instances where you need to write a cheque. By reconciling your bank account your are following up to make sure that the cheque has been cashed. What could go wrong you ask? Well that is a great question. Let’s say you have written a cheque to a vendor and then put it out of you mind. You go on doing business just as you normally would. Next month rolls around and you are ready to pay yourself, pay your staff, pay another vendor, transfer funds to savings… you check your account balance, the money is there, cool! You proceed with your transaction. A few days later you account is suddenly overdrawn and now you have the worst of the worst…NSF fees! Gah, the cheque you had written weeks earlier has finally cleared and you didn’t have the cash in the account to cover it. Cue the stream of expletives!

You may think this rarely happens…well you would be wrong. It happens, and it generally happens to people who never reconcile their accounts.

Step 4

Did you know that those pesky bank charges are a deductible expense! OMG they are!!! But only if you are recording them 😉 Further, interest incurred solely for the purpose of running your business is also deductible. Wow!  Oh wait remember that post where I discussed why it is important to keep your business accounts separate from your personal? Yup, this is another benefit to doing just that. It all adds up my friend.

Step 5

You are now ready to formally reconcile the account in whatever software you are currently using for your accounting. While I would love to give you the play-by-play here honestly it is just not practical as there are so many different platforms and they are so nuanced. The process however is the same.

• Enter the statement end date.
• Enter the closing balance from the statement.
• Check off the transactions that match.
• Correct entries that do not match.
• When the difference is zero you are done.

Tips and tricks

1. I find it helpful to have a pencil and a ruler on hand when I perform my monthly recs.

Why? Because you will literally be going over your statement line by line. Put a little check mark beside the transactions that are entered and matched, a star next to transaction that are not entered.

2. Have your source documents organized ahead of time. Chronological is easiest, separated by payment method even better.

Why? Because if a transaction was not entered or entered incorrectly you will have the document right there to correct it.

3. Identify if an error is from transposition. This is where you have entered 540 as 450 for example.

How? If the amount of the discrepancy is divisible by 9 then you have transposed the numbers in a an entry.

4. Identify if an error is from a slide.Either the decimal has been misplaced. Or you have a wayward zero

How? Well, it will not be divisible by 9 and the amount of the discrepancy will be quite noticeable.

5. Identify if the error is from reverse posting. A debit may have been posted as a credit or vice versa. Journal entries can be confusing and sometimes we get them backwards.

How?  If the amount of the discrepancy is divisible by 2.

 

When things don’t go as planned

If you balances do not match it can point to a couple possible causes.

1. You had opened the account before you started using the accounting software. You need to add an entry for the opening balance. Post this to the opening balance equity account. Be sure to add a memo so that you can search for it later if needed.
2. An expense/deposit has been posted to the wrong account.
3. A transaction has been posted twice.
4. A transaction that has occurred in a prior period was changed.
5. A transaction has not been posted, or in english… you still have to enter it.

 

If all else fails sometimes the best thing to do is take a break and come back to it later. Or get a new pair of eyes on it if you have a willing participant. If you still can’t crack it maybe it’s time to hire a professional. Bookkeepers are trained to perform bank reconciliations; an experienced bookkeeper can make quick work of a bank reconciliation so you can get back to running your business.

So tell me do you have a bank reconciliation horror story? What did you do to resolve it?