Welcome to Commerce Sync’s new blog series! “That’s a Really Good Question” will focus on the accounting, marketing, human resources and general questions you’ll ask most as a small business owner. We’ve gathered a varied group of industry pros to share their answers and expertise with you. This week our focus is on the basics of reconciliation.
If you’re like most small business owners, time is not on your side. The thought of doing a reconciliation after a day of putting out fires is exhausting and easy to put off. Suddenly, a few months have passed and you’ve forgotten to pay an invoice or you don’t have enough cash on hand to buy new inventory.
By putting off reconciling your accounts, you are operating your business blindly, without the up-to-date information you need to make smart decisions. As part of our Commerce Sync’s new series, “That’s a Really Good Question,” I’m going to answer one of the questions I hear most often from my clients:
What’s the easiest way to balance my accounts?
Here’s 4 simple steps to follow:
Compare closing balances from your bank and from your books. Most accounting software has a reconciliation module that allows you to enter the ending cash balances of your bank account to help you with this process. If you don’t want to use that, print out your month’s transactions on paper or export them into an Excel spreadsheet. You need to start with matching balances or this entire exercise is doomed, so if the numbers don’t match, you’ll need to go back a previous month, run through the steps outlined below and adjust transactions as needed.
Add bank-only transactions to your book balance. There are usually some debits and credits your bank tacks on that you haven’t accounted for in your books. Add in credit transactions (like monthly interest earned) and subtract debit transactions (like monthly fees or bounced check fees) to your book balance.
Add book-only transactions to your bank balance. Your bank statement won’t reflect outstanding checks that haven’t been cashed yet and it might not show deposits that are still being processed. Add the credit transactions and subtract the debit transactions from your bank balance. If you are using accounting software, your reconciliation module should allow you to tick off the checks and deposits listed on your bank statement — making it obvious which transactions are missing and need to be accounted for in your bank balance.
Compare the balances. Compare your adjusted book balance with your adjusted bank balance. In a perfect world, these numbers match and you’re done! If they’re not the same, there are a few potential culprits:
You’ve made a transposition error — If the difference between your balances is divisible by 9, you’ve probably transposed one number for the other. For example, you wrote a check to someone for $54 dollars but you recorded it as $45.
You forgot to record a transaction.
Your beginning cash balance is incorrect — in which case you’ll have to go back through your records until you find a point where your book and bank balances did match and start from there.
A general ledger entry credited or debited your cash account and you forgot to record it.
Nobody’s perfect and every once in a while, you just won’t be able to get your accounts to reconcile. If the difference is negligible, don’t waste your time — adjust and record the difference as a reconciliation error and move on with your day.
Source: Nancy Chisholm, CPA.