The bank reconciliation - dear to the hearts of accountants everywhere; a mystery to many business owners. Yet fundamental to running your business and protecting it from financial disaster. I'm sure more than a few folk harbour the suspicion that the bank reconciliation is some sort of esoteric exercise dreamed up by accountants to justify their existence. Not so!
The truth is, the bank reconciliation is the single most important "financial control" that operates (or should operate) in almost any business - whatever your business happens to be. It does not matter whether you are running a tiny start up or a huge multinational, good financial control starts with the "bank rec".
If you follow the financial press at all, the recent downfall of German fintech Wirecard is a lesson in point; had the auditors at EY undertaken the most fundamental checks from the accounting records back to the bank, the problems there might have been spotted much earlier.
Let's remind ourselves (briefly) what a bank reconciliation is. It's a three-step process:
1. checking whether the amount of money in your bank account, as stated on the bank statement, agrees to the bank balance as stated in your bookkeeping system;
2. verifying whether any discrepancy between the two is justified - which will only be the case where specific items in your bookkeeping system have yet to reach the bank statement (these "timing differences" represent recent payments and deposits that have not cleared); and finally, where the discrepancy cannot be entirely attributed to timing differences,
3. investigating and correcting the error(s) within the bookkeeping system.
Whether you keep your business records on a spreadsheet, or on accounting software (like Sage, Quickbooks or Xero), the concept is exactly the same.
Bank reconciliations should be performed at least monthly, though businesses with high volumes/ values of transactions may undertake them more frequently, sometimes even daily.
Why does this matter? If you're the business owner, you probably want regular assurance that the payments are receipts shown in your bookkeeping system are accurate, complete, and recorded on a timely basis; regular bank recs will tell you whether or not this is being done successfully. The other benefit is that if someone else is keeping the books for you, reviewing the bank rec (and the bank statement) on a regular basis can help you detect fraud.
Even in the age of cloud computing and automated bank links, the bank reconciliation retains its important role since automated links are never 100% fail-safe, and cloud systems won't automatically record payments and receipts that have not yet hit the bank.
Contact us for further information.