The failure to perform a monthly bank reconciliation means that you never know if your financial statements are accurate.
You reconcile your bank statements to ensure the matching of the balances in your accounting records corresponds to what’s reported on a bank statement. Do this on a timely basis to turn your financial statements into a vital management tool to make more profitable decisions.
Overview
Reconciling your monthly bank statement against your general ledger is the single most straightforward way to detect any discrepancies, correct errors, prevent fraud, and verify cash flow. The goal of this process is to ascertain the differences between the cash balances on the balance sheet to the corresponding amount on your bank statement and to book changes to the accounting records as appropriate.
Below are five reasons why your reconciliations should be performed monthly to avoid cash shortfall surprises and unnecessary overdrafts:
- Detect errors such as double payments, missed payments, transposed numbers, and forgotten entries in the general ledger.
- Avoid surprises involving payments that haven’t cleared, fraudulent transactions, and theft by investigating what doesn’t make sense.
- Save money by identifying subscriptions you meant to cancel, catch fees you don’t realize you are being charged to avoid months of payments that are unlikely to be refunded.
- Verify your exact cash position beyond your weekly tracking of accounts payable and receivables of the business.
- Confirm your financial statement accuracy. This is impossible to do when you don’t prioritize the monthly bank reconciliations. Lenders and investors also inspect bank reconciliation reports to assess the financial stability of an organization; all the more reason they should be up to date.
Ideally, you should reconcile your bank account each time you receive a statement from your bank. This is often done at the end of every month. Before beginning the reconciliation process, you should ensure that you have recorded all transactions up to the end of your bank statement.
The practice of monthly bank statement reconciliation is a useful tool for business owners to both identify problems and maintain a clear understanding of their financial position. Most accounting systems make reconciling bank and credit card statements relatively easy, efficient, and manageable.