The bank reconciliation refers to the process of matching up the information on a company’s bank statement with the corresponding balances in its accounting records for cash accounts. This process aims to find out the differences between them and record the changes to the company’s accounting records (Also see How Do Accountants Record Transactions?). On the bank statement, the company can see all the information the bank has recorded about the transactions that have impacts on its bank account throughout the last month.
As a business owner, you should complete bank reconciliation regularly for all the bank accounts your company has. This is to make sure that the cash records you have made are correct. If you are unfamiliar with accounting, do not hesitate to engage an accounting firm in Johor Bahru to help you out so that you can spend your precious time on other core business activities. If you do not do bank reconciliation, you may find out that your cash balances are a lot lower than what you have expected (Also see How to Handle the Cash Flow of Your Business?). This may bring to overdraft fees or bounced cheques. Besides, you might be able to detect some frauds by carrying out bank reconciliation. Then, you can use the information collected to improve your company’s control over the payment and receipt of cash.
If your bank account has so little activities that you do not need to carry out a bank reconciliation regularly, you should think about the reasons for the existence of that bank account. A better option is to close the account and transfer the funds in it to another account which is more active. Thus, it can be easier for you to invest the remaining funds and track the status of that investment.
You should perform a bank reconciliation at least once a month shortly after each month has ended. You should do so when you received the bank statement from the bank, which contains the bank’s opening cash balance, all the transactions throughout the month, as well as ending cash balance. If you can perform a bank reconciliation daily according to the month-to-date information from the bank that you can access from the bank’s website, that is even better. Doing so enables you to notice any problems and rectify them immediately.
It is almost impossible to see the company’s opening cash balance to have the same amount as the ending cash balance. This is because the company may have a lot of deposits in transit, payments (Also see How Can You Collect Payment for Overdue Invoices?), penalties which is usually charged for overdrafts, bank service fees, and so on.
In the process of bank reconciliation, you should start with the ending cash balance. Add any deposits in transit to the ending cash balance and deduct any cheques that are not cleared yet. After adding or subtracting this amount with other items (if any), go to the ending cash balance and subtract any bank service fees, penalties or not sufficient funds cheques (NSF cheques) from it, and add any interest earned to that amount. When you have completed this process, the adjusted ending cash balance of your company and the adjusted bank balance should be the same.