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I always considered the bank reconciliation process to be like washing dishes. Have you ever left dishes in the sink and let it pile up? What was it like after a full day? Now imagine what it would be like if you left the cleaning to your future self to clean up after a month, a year, or even multiple years. The more dishes there are, and they longer that they’re left out, the harder they are to clean. If you ever had the misfortune of cleaning a potato masher after it was laying in a pot for a couple nights, you would know my pain.
Reconciliations work in a similar way. The more often you do them regularly, the less transactions there are to organize, and the easier they are to reconcile. That said, how often should you reconcile? Should you only do it daily? Is it viable to do it weekly, monthly, or quarterly? After all, some businesses even reconcile only once every six months.
The answer is, it depends. I get it. It’s not what you wanted to hear. Just know this: quite a lot of businesses are perfectly fine with monthly reconciliations, but there are reasons to deviate from that depending on the company or client. I’ll go further into that later with the various factors that influence reconciliation frequency. To properly lay down the groundwork for that, let me explain first what exactly a bank reconciliation is.
What is a Bank Reconciliation?
Bank reconciliations consist of a bank statement and the books of a business. For the purpose of this article, I’m going to reference the books of a business as the cash book.
Bank Statements
The bank statement is managed by the bank. It is going to list all the cash receipts and withdrawals that a business makes over a period of time.
Cash Book
The cash book is going to record what a business thinks it has in the bank after accounting for factors that increase or reduce cash flow over a period of time. It is managed by the business, usually by a bookkeeper, accountant, or the owner.
To reconcile something means ‘to make even’. After fighting with friends, you make up with them by reconciling with them. If the numbers in the bank statement and the cash book don’t match up, there’s a conflict. Resolving that conflict is needed to run a functioning business.
The Importance and Benefits of Bank Account Reconciliations
Doing regular reconciliations help keep your financial records accurate and complete. Money is exchanging in many different hands, and depositing at different times. It’s great to know what you actually have in the bank before making a big purchase. Moreover, data that helps grow a business will be flawed if the data is also flawed. For example, you can’t deduct food expenses that were used to entertain clients if those expenses aren’t properly recorded in the cash book. The same goes for when you think the business has more money than it actually does in the instance that a check from a customer bounces and it wasn’t recorded in the books.
The second important reason to reconcile is to detect fraudulent activity. Someone from within the company or outside the company could potentially commit unauthorized illegal wire transfers that devastate company finances. For instance, Business Email Compromise (BEC) scams are a cyber crime that in 2023 accounted for $2.9 billion in reported losses in the real estate industry.
By checking records often, you can find mistakes and stop fraud. This keeps your money in good shape and your records correct.
Risks of Ignoring Reconciliation
Besides fraud, ignoring bank reconciliations can lead to serious compliance issues with the IRS. Inaccurate or incomplete returns can result in misreported income or expenses, which may trigger audits, penalties, and fines. The IRS expects accurate and timely reporting, and neglecting bank reconciliations can undermine a company’s ability to meet these expectations, potentially leading to costly consequences.
Furthermore, neglecting bank reconciliations can stack errors in the books over time, making it increasingly difficult and time-consuming for accountants or bookkeepers to fix the situation. Those tasked with cleaning up months or even years of neglected books will likely need to invest more hours to reconcile accounts, sift through transactions, and identify bank errors or inconsistencies in the bank balance. This additional effort translates into higher fees for the business, as the bookkeeper or accountant must expend extra resources to bring the finances back into order.
Ultimately, the longer bank reconciliations are ignored, the more costly and burdensome the cleanup process becomes to bring back clean and accurate data that keeps the company in good standing.
Factors Influencing Reconciliation Frequency
The number of bank reconciliations can vary a lot. It depends on three main things.
Size of the Business
Big businesses need to check their accounts more often. Think of a plumber that is self employed as a sole proprietor that services small towns in their local area vs a corporation in a large city that has over 100 employees. The larger the business, the more cash flow that they’ll have to track.
Bank Statement Frequency
Normally, banks send statements out once a month. But now, many banks let you see your account online every day. This means a business can keep up with its accounts better and perform as many reconciliations as they’d like.
Standard Times for Reconciling Bank Accounts
I consider these two the most common times to do a reconciliation:
Monthly Reconciliations
This is going to be the bread and butter, gold standard for most small businesses as well as for many accountants and bookkeepers. Checking your bank account each month is key. This way, you make sure your money is moving as it should.
It’s often enough to spot any errors and fix them without much hassle. If you’re using paper bank statements, you’ll get the statement at the end of the month and create an adjusted balance that is equal to the adjusted balance of the cash book.
Weekly Reconciliations
Some businesses prefer to check things weekly, especially if they have lots of transactions. The availability of online banking has made weekly reconciliations possible. Doing it more often helps catch any discrepancy quickly. It stops errors in the balance sheet or cash account before they cause big problems. Otherwise it’s like trying to find a needle in a haystack.
Well, Then How Often Should You Reconcile Your Bank Account?
How often you should check your bank account varies. It depends on what your business needs. It’s vital to keep your account balance correct and your accounting records detailed. These steps are crucial for your financial well-being. Checking your accounts often, like monthly, weekly, or even daily, helps catch fraud early.
Consistent and regular checks are the recipe for effective reconciliation. They ensure your records stay exact. Here’s a table with advice on how often to check, depending on your business’s size:
| Business Type | Transaction Volume | Recommended Frequency |
|---|---|---|
| Small Business | Low to Moderate | Monthly |
| Medium to Large Business | High | Weekly |
| Huge Enterprises | Very High | Daily |
Tools to Assist with the Bank Reconciliation Process
Efficient reconciliation is key for accurate financial records and control. The right tools make tracking accounts receivable and bookkeeping easy.
Quickbooks
QuickBooks is crucial for many businesses, making bank reconciliation easy. It automates transactions and helps manage accounts receivable. It is great for small to medium enterprises for better control. This is the main software that I work with and recommend. Intuit has been in the game for a long time, and you can tell with the robust features to suit any bookkeeping needs.
Xero
Xero makes financial record-keeping easy for any business. It lets users match transactions and manage expenses. It also integrates financial operations for a united system.
Sage Intacct
Sage Intacct is perfect for big companies needing high-level internal control. It automates reconciliation, managing large amounts of data effortlessly. It also helps with accounts receivable and bookkeeping for accurate reports.
What to Consider When You Reconcile Bank Statements
Deposits in Transit
When reconciling bank statements, one crucial factor to consider is deposits in transit. These are deposits made by the company but have yet to appear on the bank statement. Failure to account for deposits in transit can result in an understatement of the company’s cash position, leading to inaccurate financial reporting. To reconcile correctly, ensure all deposits made by the company are recorded and compare them with the bank statement to identify any outstanding deposits.
Bank Error Understated
Bank errors, such as understating deposits or failing to record certain transactions, can throw off the reconciliation process. It’s essential to carefully review each transaction listed on both the company’s records and the bank statement to detect any discrepancies. If a bank error is identified, promptly contact the bank to rectify the issue and adjust the company’s records accordingly to ensure accurate reconciliation.
Outstanding Checks
Outstanding checks represent payments issued by the company but have not yet been cashed or cleared by the bank. Neglecting to include outstanding checks in the reconciliation process can lead to an overstatement of the company’s . To reconcile accurately, list all outstanding checks and deduct them from the bank’s ending balance to reflect the true cash position. Keeping track of outstanding checks ensures that the company’s financial records align with the bank statement and prevents discrepancies in cash reporting.
What to Consider When You Reconcile the Cash Book
Notes and Interest
When reconciling the cash book, it’s essential to account for any notes receivable, interest earned, or other non-standard transactions. Failure to include these items can result in understated balances, leading to inaccurate financial reporting. Ensure that all relevant transactions are recorded in the cash book and accurately reflected in the reconciliation process to maintain transparency and precision in cash reporting.
Understated Errors
Understated errors in the cash book, such as omitted transactions or recording errors, can distort the reconciliation process and lead to misaligned financial records. Thoroughly review each entry in the cash book to identify any instances of understated errors and make corrections as needed. Addressing these errors promptly ensures that the cash book accurately reflects the company’s financial position and facilitates a smooth reconciliation process.
Bank Fees
Bank fees, such as service charges, can impact the company’s cash balance and should be accounted for when reconciling the cash book. Nobody likes to see bank fees and charges on their account, but it’s all a part of doing business. Failure to include bank fees in the reconciliation process can result in overstated cash balances and inaccurate financial reporting. To reconcile correctly, review the bank statement for any incurred fees and deduct them from the cash book balance to reflect the true cash position accurately.
Overstated Errors
Overstated errors in the cash book, such as duplicate entries or miscalculations, can lead to inflated cash balances and distort financial reporting. It’s crucial to meticulously review each transaction in the cash book to identify any instances of overstated errors and take corrective action. Addressing these errors promptly ensures that the cash book aligns with the bank statement and provides an accurate depiction of the company’s financial health.
Adjusted Balances and Totals
When we’re making sure our financial records match up, it’s super important to check that the adjusted balances and totals are all correct. This means we need to look closely at things like accounts payable (money we owe) and the general ledger (a big record of all our financial transactions). If the adjusted numbers don’t match up like they should, it could mean there are mistakes in our records, which can cause problems down the line. So, we need to carefully compare these numbers to catch any errors and fix them right away.
Once we’ve made sure everything adds up correctly, the next step is to update our records by making journal entries. These entries show any changes we’ve made to our financial records, like correcting mistakes or adding new information. It’s like updating our financial diary to make sure it tells the true story of our money. Doing this right after we’ve checked everything helps keep our records accurate and up-to-date, which is really important for making smart decisions and following the rules. Plus, it keeps our accounting process running smoothly and keeps us on track with what we owe and what we’ve got.
To see how this works in Quickbooks, check out this video:
Conclusion
It’s crucial to adapt how often you reconcile your bank accounts to match your needs. This is true for large companies or small businesses. Factors like your size, how many transactions you have, and your control systems should shape how often you check.
Reconcile your bank statements as often as you need. This helps spot mistakes early, stopping them from becoming big issues. It keeps your financial records correct, preventing costly errors and fraud. In short, getting your banking right means your money is in safe hands.
Anyone involved in finance should keep up with this. It’s not only for top executives. Regular checks actually keep your financial health strong. They make reporting accurate, aid in planning, and help you manage your money better.
So, use tools like QuickBooks or big software systems to make this easy. Whether you’re checking a lot of company expenses or overseeing a big budget, it pays off to keep your accounts in order. By doing this regularly, you stay on top of your finances and avoid problems.
Remember, the key is to adjust how often you check to what you need. Yet, always strive for accuracy. This way, you keep your financial world safe and sound.