As a business owner, you might wonder why it is important to reconcile your bank accounts. Well, bank account reconciliation is essential that keep the business finances in order. Now, the question arises: what exactly you can prevent by preparing a bank reconciliation statement?
What are the risks of not performing a bank reconciliation?
When there are mistakes in your cash balance and you have different amounts on the accounts, all these discrepancies must be resolved. With bank account reconciliation, you can address the issues and identify them before they become actual issues.
- Businesses that fail to regularly reconcile their bank balances expose themselves to the risk of fraud, banking errors, or unauthorised withdrawals. If not addressed, these issues can cause cash flow leaks, potentially preventing business growth and overall operations.
- Additionally, if a small business neglects regular bank reconciliation, it increases the likelihood of digital payments being declined and checks bouncing. This can harm relationships with suppliers and partners, leading to stricter payment terms and higher fees.
- A business account doesn’t offer the same legal protections as a personal account. While minor issues, like a bank error, can usually be resolved quickly, the situation is different when it comes to fraud.
- Businesses are responsible for preventing fraudulent activity on their own. Bank reconciliation plays a crucial role in identifying these issues early, ensuring they don’t persist for too long.
Why is it important to reconcile your bank accounts?
A bank account reconciliation is an important aspect for every company that wants to keep its bank accounting in order. By reconciling your bank accounts, you can enjoy the following benefits:
- Detect fraudulent activities
By reconciling your accounts, you may be able to detect fraudulent activities. By making a comparison of your bank statements against your internal records, your bookkeepers in Melbourne can quickly address inconsistencies. Fraud can be turned into any form, and staying consistent with reconciliations can help you catch possible issues early.
- Provide you with a clear picture of the company’s financial status
Bank account reconciliation statements can help you learn about the financial status of your company. For instance, if your accounting information doesn’t match your bank statement balance, it means you are paying more than necessary. It can also help you spot any possible interest income or bank service fees that you are unaware of. As a result, you will come to know about the bank balance of your company accurately.
- Cash flow monitoring
Being a business owner, you must monitor the cash flow of your company. With reconciliation, you can see the flow of money into your accounting records, helping you spend wisely and plan your payments. A common source of reconciliation discrepancy is monitoring receivables. Reconciliation helps you detect errors associated with accounts receivables.
- Accurate tax reporting
For an accurate tax return, your bank statement balance and your own balance must be consistent. It will allow easy tax calculation, resulting in accurate tax reporting. Small business accountants in Melbourne ensure to prepare and lodge accurate tax returns using accurate financial records.
How to Reconcile Your Bank Statements
Your financial institution will typically send you a bank statement regularly.
- Compare Balances
Gather your accounting records and match all deposits and withdrawals with your bank statement. Check for any fees or charges from your bank. - Check for Differences
Timing differences, like deposits in transit or outstanding checks, are normal. Make sure to reconcile your bank statement with your cash balance to catch any hidden fees. - Resolve Issues
Look for errors like duplicate transactions or voided checks. Bank reconciliation helps identify discrepancies so you can fix them. - Adjust Balances
Once you spot the issues, adjust your bank balance. Include in-transit deposits, correct errors, and account for any fees or interest. - Compare Adjusted Balances
Check if your adjusted bank and cash balances match. If not, repeat the process to find any remaining discrepancies. - Final Adjustments
Once everything matches, update your journal entries to reflect any fees, interest, or errors in your records.
Conclusion
Bank account reconciliation is crucial if you want to be sure that your bank statement doesn’t contain any discrepancies. You can choose reliable bookkeeping services to make sure you have reconciled bank accounts on time to avoid mistakes.