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What is a bank reconciliation and why is it important - Strata-G Blog

The words “Bank reconciliation” are probably among the first a new entrepreneur will have heard, but what exactly do they mean and why is this process so vital?

 

A bank reconciliation is quite simply the act of comparing what appears on a company’s bank statements with its accounting books. Physically checking the bank statements and understanding each payment and expense as it relates to the company’s accounting allows an owner to pick up discrepancies, and, importantly, ensure accurate and consistent financials.

 

Ideally a business owner should check accounting against the bank statements monthly to link payments with invoices, and expenses with receipts, to identify issues such as double entry, unpaid invoices (or bills), or discrepancy with employee expense reimbursements that can be rectified in a timely manner. This article addresses the typical bank reconciliation steps and provides solutions through cloud accounting to eliminate the manual effort that bank reconciliations create – saving you precious time.

 

For small businesses, Strata-G recommends implementing a cloud-based accounting solution such as Xero  or QuickBooks online (QBO). These tools have valuable bank reconciliation support built in, and have Apps such as Hubdoc and/or Dext to automate the monthly reconciliation process in real-time.

How to manually identify discrepancy in bank reconciliations

If there is a discrepancy between your bank statements and your accounting system, there are three key errors to look for.

1.

Remember that just because a payment was made on a specific date, and a payment notification was received for that date, this does not mean it cleared the bank on the same date. Go down your bank statement and look at the transactions which occurred in and around payment date to ensure that the timing of the transaction meets up with the payment notification. Try reconciling the account a day or two before or after the statement date and see if it matches then.

2.

Errors frequently occur in the crossover between bank statements/months. Banks sometimes duplicate dates on statements and this can make it look like expenses were made twice or payments were received more than once, when in fact they are simply being repeated.

3.

Errors frequently occur in the crossover between bank statements/months. Banks sometimes duplicate dates on statements and this can make it look like expenses were made twice or payments were received more than once, when in fact they are simply being repeated.

If the above errors have been corrected and reconciled and a difference remains between your bank balance and the balance within your accounting records, the underlying issue may relate to prior accounting periods. It is a best practice to complete bank reconciliations monthly, at a minimum, to maintain discrepancies within the shortest timeline possible. Going through several months (or a year) will create days wasted in reconciliation headaches that you do not have time for.

To confirm if the error is from a prior period check whether the bank statement opens on the same balance as the accounting books. A discrepancy signals a problem exists in the past, and it is a prior month’s accounting that needs to be rechecked.

Avoid the headache – Automate the Bank Rec!

Business owners who are not savvy with bookkeeping or who struggle to find the time to reconcile their books should consider accounting software, which can easily link and track accounts and bank statements to automatically ensure that all invoices are paid, and expenses reconciled. This will save a huge amount of time and will ensure there are no unpleasant surprises come tax time (who wants to pay tax on one invoice entered twice?).

Using the Cloud-based accounting solutions and Apps discussed, the following steps illustrate how the manual bank rec headaches can be eliminated, and the reconciliation process automated:

1.

Using Hubdoc or Dext Apps, snap a photo with your Phone and upload, or drag and drop receipts/bills from your computer, or email to the App with a unique email address connected with your business. Additionally, you can set these Apps to automatically pull in your online bills from certain vendors (Telephone, utilities, Google, etc)

2.

Build in rules within the App to assign the expense to the appropriate expense account, and if you forget the Sales Tax, no problem, the App will not. The App is designed to read the document to identify the dates, sales tax, and amounts and learn from your accounting system to propose the appropriate expense account to use. You can automate the rule, so that each future document submitted to the App will be treated the same way for that vendor.

3.

With a few clicks, sync the App with your accounting platform (we use Xero and QBO for small businesses), with a click of a button the App will push the completed documents into your accounting system to be reconciled. Or, add a rule for common invoices to be automatically prepared and sent to your accounting records.

4.

Within Xero or QBO, link your business bank accounts and credit cards to automatically upload transactions from your financial institution. Select “Update” to bring in the most current transactions. The documents submitted by Hubdoc/Dext will appear as a “Match” to your bank transactions. Select “Match” and all transactions are reconciled in real time. Bank Reconciled!

In addition

  1. Financial Statements are prepared,
  2. GST-HST Returns are compiled, and
  3. Audit documentation is complete.
Bank Reconciliations - Strata-G

It’s a beautiful thing!

Need assistance with your bank reconciliation?

Nicholas Coburn

Nicolas Coburn, CPA, CA, has 15+ years of experience spread across Government Audit, Industry Financial & Tax Reporting, and Big 4 Canadian Accounting Firms.