Reconciling is an accounting term that really means ‘comparing to ensure they agree’.
Bank reconciliations are the most common form of accounting reconciliation, although doing this with all your financial records is no bad thing.
To do a bank reconciliation, check the transactions in your bank records match the ones in your own accounting records.
There will probably be some extras to add to your own books, such as bank fees and or bank interest, if you invested money. This keeps your own records up to date and accurate, as well as checking to make sure everything is correct.
Some accounting software, such as Xero, offers the chance to do this easily as you simply check off an item you have reconciled.
Apart from keeping your books in order, there are a few other reasons why it is important to do bank reconciliations:
Despite what we would like to think, banks do make mistakes, (more often than not in their favour), so this allows you to check for any errors and remedy them in time.
You can see if there are any pending transactions. Maybe a payment has not yet been taken, so while your balance shows a healthy amount, once this money is taken out, there could be a problem.
By keeping a close eye on these accounts you can stop your account from getting into a costly overdraft. Once you get into debt, the amount you have to pay to get back on even footing can be astonishing, so having your eye on this particular ball is well worthwhile.
Fraud does happen, and not only to big businesses; small ones can actually be easier targets as they tend to have less rigid controls. You can see at a glance if a cheque had been altered, vendors have overcharged or an ex-employee collected a payment after he no longer worked for you.
Knowing exactly what your financial situation is can help you forecast where your business should go, where you need to reduce spending which is not bringing in enough revenue and many other factors.
Our Xero accounting software is one of the ones that does offer Bank Reconciliation, along with Accounts Receivable, Accounts Payable, and many other important and time saving features. It makes bookkeeping easy, especially for small businesses which cannot afford to pay a full time accountant.