Recent analyses estimate the success rate of small businesses to be as low as 50%.
In today’s economy, accurate information is critical to making sound decisions and growing a successful business. Even minor errors can have unexpected consequences in small business accounting.
Plus, decisions made with incorrect or outdated information can snowball if unchecked. One of the most essential pieces of information is your cash balance. Luckily, the bank reconciliation is a valuable tool to verify every transaction.
If you’re interested in accounting advice or financial tips, read on!
About Bank Reconciliations
In short, bank reconciliations find the differences between your company’s cash balance and the one on the bank statement. Although it may not seem like it, these two numbers are rarely identical.
These differences usually result from one of two causes. Your company may have recorded a transaction that the bank doesn’t know or the other way around.
When you perform a bank reconciliation, you look at the bank statement and the company’s records together. Then, you proceed line by line to spot any mismatches. In this way, we “reconcile” their differences (what an apt name!).
For instance, let’s examine a typical scenario for a small business finances. Say your company receives a check from a customer, and your record an increase in your records. Although you have increased your cash balance, the bank will not!
The bank will not increase your balance until you deposit the check, it clears, and the bank gets the funds. This situation is known as a “deposit in transit” and is one type of discrepancy revealed by the reconciliation.
Bank reconciliations also reveal bounced transactions, overdraft risk, and bank fees.
Findings from the reconciliation are organized in a single financial statement. It contains two sections:
- the ledger balance, with any adjustments using information from the bank statement
- the bank statement balance, with any adjustments from the company’s records
In the end, the two adjusted balances should be equal. We call this figure the “true balance” of cash since it uses all available information.
Interested in seeing how other financial statements can show actionable information? Looking at balance sheets is an excellent place to find accounting tips!
Benefits of an Outsourced Bank Reconciliation
The bank reconciliation is one example of an internal control to keep your finances safe. Scrutinizing each transaction has several benefits, such as:
- identifying and preventing fraudulent charges
- finding and correcting accounting errors
- minimizing the risk of overdraft
- highlighting uncollected receivables
Understanding your incoming and outgoing funds is key to the operations of your business. Bank reconciliations ensure that every transaction is valid and brings your attention to any areas that need action.
We recommend having an outsourced accounting organization perform bank reconciliations. This frees up your time to work on running the business. Who wouldn’t want to cut down on the paperwork?
Nolan Accounting Center is Here to Help
We understand that accounting can be overwhelming. Plus, as a small business owner, we recognize that your time is better spent elsewhere!
Nolan Accounting Center offers affordable professional accounting services to support your organization.
With the financial advice from the Nolan team, you’ll get some peace of mind knowing your finances are under control. See how we can help with taxes, outsourced payroll, and more.