Business Accounting Basics: Bank Reconciliation

Getting to grips with the fundamentals of business accounting can often feel like information overload. At Harlands Accountants, it’s our aim to demystify accounting topics for small business owners to they can measure, analyse and report with confidence.

Today, we’re turning our attention to bank reconciliation. We’ll be exploring what it is, why it matters, how it works and more to break this seemingly complex topic down into digestible chunks and help you take on bank reconciliation for your own business.

What is bank reconciliation?

Bank reconciliation is the act of cross-referencing your business bank account statements and your own financial reporting to identify any discrepancies. Think of it as a tool for double-checking that your business’s bookkeeping is accurate and ensuring all relevant transactions are present and accounted for.

Where there are any gaps or disagreements between your bank statements and financial records, these discrepancies present an opportunity to investigate so you can diagnose any issues and make the appropriate fixes.

Why is bank reconciliation important?

At a high level, bank reconciliation helps you to gain greater visibility of your company’s financials, protect your business’s cash flow and weed out instances of fraud.

There are numerous benefits to performing regular bank reconciliation checks, including but not limited to:

• Identifying and resolving any errors: this cross-referencing exercise presents an ideal opportunity for you to spot any errors in your business’s bookkeeping. By comparing the two records side by side, you can identify these discrepancies and, from there, take the necessary steps to correct them

• Reviewing performance and profitability: having a high-level sense of how your business is performing can bring peace of mind, but nothing beats the certainty that comes with a granular analysis like a bank reconciliation. With absolute verification of your business’s own financial records, and a chance to review the true profitability of various business activities, you’ll leave this exercise with a firm grasp on your company’s financial performance

• Enjoying welcome tax breaks: the bank reconciliation process creates an ideal opportunity to identify any relevant tax-deductible expenses. In doing so, you can lower your business’s tax bill and create worthwhile savings

• Spotting fraudulent activity: crucially, bank reconciliation makes it possible to spot any instances of suspicious activity in your business’s bank account or books, as well as any other incorrect payments that need to be investigated and resolved. Without setting time aside for the direct cross-referencing of these two records, it can be all too easy to miss these fraudulent transactions

• Preparing for your tax returns: submitting tax returns to HMRC requires a complete and accurate record of your business’s incomings and outgoings. By taking a proactive approach to bank reconciliation, you can minimise reporting work further down the line and enjoy the increased confidence that comes with knowing you’ve got your accounts shipshape

Types of transactions to look out for

There are a number of typical errors or inconsistencies you’ll come across during the process of bank reconciliation, and these are the areas that deserve particular attention.

When reconciling your business bank account and books, keep a close eye on the following:

• Withdrawals: in both your bank statement and your books, you should have an exhaustive record of all withdrawals made and these should match exactly. Cross-referencing with your accounts payable can help to verify these figures and give you peace of mind that they’re complete and accurate

• Deposits: similar to your withdrawals, all deposits to your business should be present and accounted for in your books and your business bank statement. In this case, be sure to double-check your accounts receivable as this will provide insight into any in-transit deposits that may account for some discrepancies

• Bank fees: familiarising yourself with any fees associated with your business account is vital, as otherwise, these may be costs you haven’t accounted for. Review your bank account’s monthly fees to get to grips with these figures and ensure you have total visibility of these costs

• Transposition errors: you may find some examples of data being incorrectly transposed in your business’s financial records, which amounts to little more than human error but nonetheless must be identified and fixed. When transactional data is recorded in your books, there may be instances of certain digits being incorrectly inputted or reversed - and cleaning up these inadvertent errors is crucial

• Fraudulent transactions: any deposits or withdrawals you don’t recognise should trigger alarm bells, as these may indicate fraud. The process of cross-referencing these two records gives you an opportunity to match up your data and expose any unaccounted-for records. In cases where you find charges in your business bank account that you have no memory of, this constitutes suspicious account activity and may indicate that your bank details have been used without your knowledge

How bank reconciliation works

Bank reconciliation is a straightforward process that simply involves comparing your bank transactions data for a given period with a copy of your business’s accounts from that same period.

There’s no right way to perform a bank reconciliation other than to be as thorough as possible in cross-referencing every transaction to match these up between the two records, and to find and fix any discrepancies you come across through the course of the exercise.

These reconciliations are best done monthly so you can stay on top of your books and ensure they’re spotless. Over time, you’ll identify patterns in the errors you find which will enable you to six any systematic issues creating these errors for more accurate reporting in the future.

It’s only by staying this close to your financial data that you can gain these insights and evolve your bookkeeping processes in the long term.

Manual bank reconciliation can be an arduous and extremely time-consuming task, particularly when there are physical records involved. Make this a more efficient process from the start by using a digital copy of your bank transactions data, via your accounting software for example, so you can compare the two records side by side on a single screen.

Better yet, with cloud accounting software like Xero, you can further accelerate the process with the potential for automated record matching - removing a great deal of legwork involved.

Tighten the reins on your financial record keeping today by taking on your first bank reconciliation. You’ll love reaping the benefits that come with knowing your books are complete, accurate and up-to-date.

Get in touch with Harlands Accountants today for any advice, support or guidance when it comes to best-practice business accounting.