Reconciling bank statements can seem like an arduous task, but keeping on top of bank reconciliations is critical. Bank reconciliation is the process of matching your internal financial records to the bank's records of your account transactions and balance. You compare deposits, checks, and other transactions between your records and the bank's records to uncover any discrepancies or unauthorized payments.
Reconciling statements regularly delivers financial health benefits that can prevent major headaches down the road. Read on to understand six key reasons you should add bank reconciliation to your regular financial habits.
Even careful accounting can fall victim to data entry errors or omissions. Reconciling statements regularly enables you to validate that transactions, amounts, etc. were entered correctly on both ends. Catching even small data issues early prevents them from skewing financial reports or creeping up to cause problems in tax season.
Common data issues uncovered in reconciliation include:
While accounting software continues to improve, human data entry remains vulnerable to typos or mistakes. Bank reconciliation provides the key external validation to keep your books clean.
Your bank's records provide an outside perspective to verify that your financial statements accurately capture the state of your company's bank balance and transactions.
Reconciling uncovers mismatches between your records and theirs. Even small discrepancies will distort an understanding of your cashflow or assets.
You can't assume your internal financial reports present an accurate picture on their own. The bank reconciliation confirms everything is captured correctly.
Come tax season, you need to confidently attest that financial figures across sales, income, deductions, and other categories are precise. Incorrect, unreconciled transactions can lead to problems in tax returns that then require amended filings.
Tax agencies increasingly analyze bank statement data to verify reported income and expenses match organizations' actual money flows. Regular reconciliation saves potential penalties for discrepancies they uncover between tax returns and bank activity.
Moreover, sloppy reconciliation practices can actually trigger tax audits in the first place. The IRS flags businesses that appear unaware of their true earnings based on unexplained mismatches in reported income and bank deposits.
Avoid tax headaches by reconciling frequently as you go to catch errors and validate numbers.
Monitoring the money flowing in and out of accounts is vital for small business owners operating on tight margins. Reconciling bank statements enables tracking whether customer payments arrive on schedule and bills leave on time.
Watching cashflow closely via reconciliation statements also alerts owners sooner to unusual impacts like:
Catching cashflow inconsistencies quicker allows for quicker course correction. Business can improve processes, follow up on late payments, or better time large expenditures with cash reserves.
Unfortunately, fraud and embezzlement remains a leading risk for small businesses. Comparing bank statement data to internal records makes unauthorized payments standout.
Moreover, analysis during reconciliation can detect patterns like payments shifting to new vendors or withdrawals matching no internal payroll records. This prompts further investigation before major assets vanish.
Simply the act of regularly reconciling bank statements deters fraud and theft. Separation of financial statement duties also closes opportunity loopholes by preventing a single person from handling payments as well as accounting records.
In the past, bank reconciliation involved manual entry of paper statement transactions into finance systems to compare later. This created a slow, laborious numbers matching processes spanning hours or days each period.
Today's accounting systems solve this using automated direct bank feeds. Transaction and balance data flows digitally from banks into accounting software like Quickbooks via encrypted connections.
This automation reconciles most statement data instantaneously rather than manually importing and matching transactions.
Cloud-based systems enable accessing feed-reconciled statements anytime, anywhere via web and mobile rather than shuffling papers. Owners or accountants can review reconciled balances and transactions almost immediately when banks provide updated monthly statements.
Reconciling bank statements takes on new importance given its implications for catching errors, preventing fraud, avoiding tax issues, monitoring cash flow, and confidently assessing financial position.
Web-connected accounting systems with automated bank feeds now simplify and expedite previously tedious reconciliation processes. This removes the last barrier to making reconciliation a regular habit for both small business owners and fast-growing enterprises alike.
Rather than blindly trusting financials, integrate your bank and credit card feed connections to add the external validation, security, and confidence statements reconciliation delivers.