Accounting is one of the essentials for the success of a business. You can only imagine your business growing if you know your business’s expenses, assets, expenditures, and current state. You need to keep records of every transaction that you send and receive. Your business bank statement must balance cash; if it does not, you have a serious problem in your accounting that needs to be changed. In such a crisis, bank reconciliation is the only way to help you. Read the following blog and learn what bank reconciliation is. How to do bank reconciliation? And what are some tips to follow for bank reconciliation?

What is Bank Reconciliation?

To know exactly what is bank reconciliation? Let’s take help from an example. Suppose you carried out a transaction for some business purpose, and you put the bank statement of that transaction in your accounting book. Each month, you check whether the transactions you made match the transactions in the accounting book. In simple terms, it is the cash balance between the transactions you made (your bank statements) and the transaction you record in your accounting. Checking and matching these transactions with your books is part of bank reconciliation, and if there are any discrepancies, they need to be resolved.

What is the importance of bank reconciliation?

Bank reconciliation is very important for the healthy financial activities of a business and for making accurate decisions regarding your business. Additionally, it can detect potential errors and fraud in the financial records of a small business by comparing their records with bank statements. If there are any discrepancies, they can be removed before they cause financial loss to the business.

Furthermore, when a business knows its financial situation, it can avoid overdraft fees and act according to its funds. Up-to-date financial records help the business know about its actual financial position, which helps it make informed business decisions. When a business knows its financial position, it can make strategic decisions about investment, expenses, and growth opportunities.

Now the question is how to do bank reconciliations and what common challenges small businesses face while doing bank reconciliations.

How do bank reconciliations work?

Bank reconciliation is a systematic process broken down into several steps. A small business can follow some steps to get the most out of bank reconciliations.

  1. Have all the bank records

The first step in bank reconciliations is gathering all bank statements. The statements may include checking, savings, and credit card accounts. Now the question is how to obtain these statements. Well! It depends. You can obtain these statements from an online source, through email, or even by visiting the bank. The crux is that you need to gather and put all your statements in one place.

  1. Make a comparison

The second step in the bank reconciliation is to compare your bank statements with the company’s financial records. The comparison should be made between the transactions recorded in the company’s accounting software or book and those recorded in the bank statement. If there are any discrepancies found in the company’s accounting book, software, or bank statement, they should be noted down.

  1. Know the faults

After the comparison, you will know where the errors and faults lie. All of these discrepancies need to be identified. Additionally, the cause of these discrepancies should be noted to know the problem’s root cause. These discrepancies could be due to bank errors, mistakes made by the company, or fraudulent activities. Some common mistakes include transactions that have yet to be recorded in the accounting software, incorrect amounts recorded, and duplicate transactions.

  1. Adjust the records

When the problem is identified, the solution is close at hand. Once you identify the discrepancies, adjusting the records is the next step in bank reconciliations. You can adjust missing transactions, correct potential errors, and remove duplicate transactions if there are any. Once the records are adjusted, the company’s financial position will be accurately reflected, allowing the business think tanks to act accordingly.

  1. Do reconciliation

It is the last step in bank reconciliations. Once everything is adjusted, it is time to reconcile the accounts. In this final step of bank reconciliations, you must ensure that the ending balance in the company’s accounting software matches the ending balance on the bank statement. Once done, you need to recheck the whole process to ensure everything is fine and correct. However, if there are still discrepancies, the process may need to be repeated until the records are balanced.

Take help from an accounting software

Doing bank reconciliations manually can take a lot of time and involve the risk of errors. To simplify the process, many small businesses are using accounting software, which makes the process easy and error-free. The software has some amazing features which can automatically retrieve bank statements, compare records, identify discrepancies, and make adjustments as necessary.

Hire a professional accountant or bookkeeper

A small error, mistake, or discrepancy in a small business can lead to disaster for that particular business, which is why dealing with the finance process professionally is very important. A business that does not have professionals to reconcile its accounts properly is more likely to face challenges, which can lead to errors and discrepancies in the financial records. This may impact the decision-making and operation of that business.

To overcome such blunders, a small business must hire and seek assistance from accounting professionals, such as bookkeepers or accountants. These professionals have the knowledge and experience to reconcile accounts properly and ensure that financial records are accurate and up-to-date. They can guide the reconciliation process, identify errors and discrepancies, and make adjustments to financial records as necessary.

To cut a long story short, a business must do a bank reconciliation. It helps the business detect errors and frauds, avoid overdraft fees, ensure accurate financial records, and make informed business decisions. Bank reconciliation are a step-by-step process including gathering bank statements, comparing records, identifying discrepancies, and adjusting the records accordingly.