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Bank reconciliation for small businesses, explained.

Allison Sturm

As we spend and receive cash while running a business, it is essential to monitor cash flow, debts, and other business transactions for proper accounting. This is where bank reconciliation comes in. 

Bank reconciliation is common practice for most businesses and entrepreneurs. However, some businesses still do not know how to carry out bank reconciliation; nor do they know the best tools to aid their reconciliation process.

In this guide, we will examine everything you need to know about bank reconciliation and the best digital tools you need to ensure a perfect reconciliation process.

P.S. Do you know that your payment processor can make or break your business and ruin  your bank reconciliation efforts? 

Keep reading to find out more.


What is bank reconciliation?

Bank reconciliation is a process in accounting where a company cross-checks its business records, ledgers, and journal entries against its bank statement to ensure that its finances and accounts balance. Financial institutions generate monthly statements of accounts to aid their account holders with documentation and bank reconciliation. These bank statements are usually in .csv format.

You do not need an accountant or financial expert to reconcile your accounts. You, as a small business owner, can manage your records.

When performing bank reconciliation, you should pay attention to the following;

1. Withdrawals

2. Deposits

3. Transposition Errors

4. Bank Fees: Always verify your financial institution's monthly fees. Make sure you understand your bank services to avoid hidden fees.

5. Fraud: Check any charges on your bank statements and business records to ensure they are yours. Unknown charges on your account may show unauthorized use of your bank information.

6. Compare the end balance from your previous reconciliation period.

How often should you reconcile your accounts?

Ideally, you should perform a bank reconciliation every month, as you receive your monthly bank statement. You may receive your account statement by mail or online, depending on your bank preferences. Your bank statement is a record of all your transactions for the month. For high-volume businesses or those in high-risk industries, you may need to balance your bank statements more frequently (sometimes even daily).

How to carry out a bank reconciliation

First, decide on your reconciliation method. Some people use accounting software or mobile apps to track and reconcile their bank transactions. Others keep a paper cheque book and balance it monthly to keep track of all transactions. You can also record your transactions in a simple notebook or spreadsheet.

The following are the steps in carrying out bank reconciliation:

 1.      Bank balance

The first stage in a bank reconciliation is to understand your bank's balance. Due to the timing of financial activities, your bank statement may not always match your records. Your cheques to pay invoices or other bills may not have cleared yet, and the amount may still reflect in your account.

It is also possible that your bank account balance is lower than your records. To make sure it is only a timing issue and not a major error, you need to alter the bank statement balance. The simplest method is to manually alter your reported bank amount in a spreadsheet. For the bank balance section of the reconciliation, you can simply make manual modifications to the figures supplied by the bank.

You can alter your bank balance through the following:

1. Adjust the ending balance on your bank account.

2. Add the balance of deposits in transit to your starting balance. Those deposited cheques are funds you have received and accounted for but haven't yet shown up in your bank balance.

3. Deduct any unpaid cheques from your account. Since the cheques have not been cashed yet, remove them from your bank balance to match your records.

4. Check for bank mistakes. Notify your bank if you see any errors. 

2.     Book balance adjustment

The cash balance in your financial records may also need to be adjusted. For example, certain bank fees are automatically debited from your account that you have not written in your records. If the figures match after this, your bank reconciliation statement is complete.

You can adjust your book balance through the following:

1. Subtract bank or service costs. Your bank automatically charges these fees based on your account terms. You may not be notified of these charges, so you may not account for them in advance.

2. Subtract NSF or bounced cheque fees. Since you can't predict if a customer's cheque will bounce, you don't learn about these fees until you reconcile your account.

3. Make a book entry to record your interest income. Your bank immediately credits your account with interest, so you must record it.

4. Adjust your records for any bank cheques.

5. Check your cash account for transposition problems.

 3.      Compare balances

The final adjusted amounts should be the same for both bank and book. If they aren't, something is wrong. You should examine whether there was an error, omission, mismatch in reconciliation dates, or fraud. 

Importance of bank reconciliation

 1.      Detect fraud 

When balancing your bank account, look for signs of fraud. For example, were valid cheques duplicated or changed? Were cheques written? Were there unlawful withdrawals? Is there a deposit missing? 

Reconciling your bank statements might also help avoid employee theft. Keep in mind that consumers have more protection than corporations with their bank accounts. Since businesses cannot always rely on the bank to cover fraud or errors in their accounts, early detection of fraudulent or suspicious behaviour is critical.

 2.      Verify financial statements

You can identify abnormalities like erroneous amounts, duplicate entries, and other data entry problems by reconciling your bank statements. Reconciliation ensures that no payments or transactions are missing from your ledger, preventing future errors or overdrafts.

 3.      Accurate tax reporting

Reconciling your bank statements helps to generate accurate tax returns. It gives you a better idea of your financial situation. Examining both your personal and financial records can help you understand where your money is coming from and going. It is like using a budgeting tool that tracks your spending habits.

Digital tools for a more efficient bank reconciliation

While you can manually reconcile your accounts, account reconciliation software enhances accuracy, insights, controls, and lowers audit risks. Your software will also help to standardize the account reconciliation procedure and ensure consistency and accuracy.

Here are the top two digital tools that will do most of the work for you: 

 1.      Online invoicing and accounting software: Quickbooks

With Quickbooks, you can easily reconcile your financial accounts. You can compare your monthly account statement to what you see online to ensure the two closing numbers match.

QuickBooks Online integrates both your bank statements and individual transactions. You can also reconcile in real time as new transactions come in. You can either check and upload these transactions manually, or ask QuickBooks Online to identify a match in your online records.

QuickBooks also has an invoicing tool that automatically creates invoices to send to customers. You can also auto-import your sales and expenses in QuickBooks using the sync with Square app. The tool features accelerated invoicing that allows you to customise an invoice template to send invoices to more clients faster. The progress invoicing feature enables you to send an invoice to your clients based on project milestones or on the percentage of work completed.

The software has accountant access and additional Quickbooks Pro Advisor Network features. You can invite your accountant to QuickBooks Online by email to grant them full access to all of your account's features at no additional charge. It is also easy to discover a certified accountant through the QuickBooks Pro Advisor Network or by subscribing to QuickBooks Live.

Some great alternatives to QuickBooks are Xero, Wave Accounting, Freshbooks accounting, and Sage.

 2.      Online payment processor: MazumaGo 

Remember that your payment processor can either make or break your business.

Quickbooks is a great tool to create invoices and manage reconciliation, but it doesn’t offer an integrated payment service. You can create and print a cheque based on your online invoices, but that would defeat the purpose of digital tools, and result in a delay in payment.

There is a better way to do this. With MazumaGo, you can easily create unique payment links and add them to the Quickbooks invoice you email to your customer. This does not only save you time and resources, it also gives your clients an easier way to pay. Your customers can accept the payment request via online banking or credit card, whenever, wherever. Bank transfers are free for your customers. If they choose to pay via credit card, they are charged with an additional service charge, but no extra cost to you.

Similarly, MazumaGo makes it easy for you to pay bills on time and build stronger supplier relationships. All you need to send payment to your supplier is their email address, no routing information needed.

The best part: There are no limits to the payment amount and you pay a flat fee per transaction. 

MazumaGo also lets you track payments in real-time every step of the way and add custom transaction descriptions to each payment. This makes it easier for you to monitor your cash flow and compare it against your bank statement for the reconciliation process. You can also go back to check your transaction history for details about your transactions when doing your bank reconciliation.

To get started, simply sign up for a free account or book a demo to learn more. You are only a step away from enjoying seamless transactions and bank reconciliations.

Make business payments move.