Your current bank account balance doesn’t actually represent your available cash. If you have a few sizable checks outstanding, your business checking account can easily go into the red.
By maintaining separate accounting of your transactions, and performing a monthly bank reconciliation, you can understand your cash flow and true cash position. The bank reconciliation process is similar to balancing your checkbook: It reveals any erroneous or missing entries so you can be confident that your cash balance is correct. Here are the steps to follow.
1. Compare Closing Balances From Your Bank and Your Books
You should always compare your bank statement and accounting balance — also known as your book balance — side by side and adjust transactions until both cash balances match. Most accounting software has a reconciliation module that allows you to enter the ending cash balances of your bank account to assist you with the reconciliation process. If you don’t have that, print out the month’s transactions on paper to compare them or export them into a spreadsheet program.
2. Add Bank-Only Transactions to Your Book Balance
There are usually some monthly debits and credits your bank tacks on that you didn’t account for in your books. Add positive transactions — like a monthly interest payment from your bank — and subtract negative transactions — like bank charges and bounced check fees — from your book cash balance.
It’s pretty easy to spot these bank-initiated transactions. There will only be a few, and they are often grouped together at the bottom of your bank statement.
3. Add Book-Only Transactions to Your Bank Balance
Your bank statement won’t reflect outstanding checks that payees haven’t cashed yet, and it may not show deposits still being processed. Add the positive transactions — deposits in transit — and subtract negative transactions — checks waiting to be cashed — from the bank balance.
It won’t be readily apparent which transactions aren’t accounted for in your bank statement. This is where your accounting software comes in handy. Most reconciliation modules allow you to tick off the checks and deposits listed on the bank statement. If you don’t have a reconciliation module, you can tick off transactions manually.
4. Compare Your Balances
Compare your adjusted bank balance and your adjusted book balance. Ideally, the numbers match and you’re finished. If they’re still not the same, there are a few potential culprits:
- Transposition error: If the reconciliation difference is divisible by 9, that’s an indication you’ve made a transposition error — inputting the wrong amount in your accounting system. For example, you wrote a check to someone for $32, but you recorded it as $23 in your accounting software. You can avoid these errors by printing checks directly from your accounting system.
- You forgot to record a transaction: A check went out or a deposit was made and you forgot to record it. Scrutinize any items listed on the bank statement that aren’t listed in your books — do they look familiar? If the transactions did indeed occur, add them to your book balance.
- Your beginning cash balance is incorrect: If your beginning balance in your accounting software isn’t correct, the bank account won’t reconcile. This can happen if you’re reconciling an account for the first time or it wasn’t properly reconciled last month.
- A journal entry affected your cash balance: You could have accidentally booked a journal entry that debited or credited cash. Navigate to your list of journal entries and ensure that none of them impacted your bank account balance.
When the Account Won’t Reconcile
Every once in a while, you just won’t be able to get an account to reconcile. As long as the difference is small relative to your bank account balance, don’t waste time spinning your wheels. Most reconciliation modules allow you to label the difference as a reconciliation error. Most likely, you’ll find the missing transaction during next month’s reconciliation.