One of the first things good bookkeepers and accountants look for (or do) are account reconciliations. Why? Reconciliations are a critical control to help ensure your business’s financial integrity. Properly reconciled accounts means all your transactions are accurately recorded.
Commonly reconciled accounts are bank and credit card; these should be done monthly. What does this mean? Simply put: a reconciliation compares what’s in your accounting system to what’s in the bank (or owing on the credit card). That said, there’s a little bit more to it, so let’s explore this further.
When performing a reconciliation, the goal isn’t a difference of zero. It is normal (and okay) for the bank balance in your accounting records to differ from the balance on the bank statement due to timing differences. What are timing differences? Timing differences may exist because you wrote a cheque that hasn’t been cashed. This cheque would show as funds out of your bank account in your accounting system but not on the bank statement. Similarly, you may have recorded a customer payment in your accounting system but the funds haven’t come in from the credit card company. These lags are called timing difference and are reconciling items. The purpose of preparing a bank reconciliation is to detect any discrepancies between the bank and accounting records (aside from those due to normal timing differences). Such discrepancies might exist due to an error on the part of the company or the bank.
Reconciliations are controls for the accurate recording of transactions however, reconciliations don’t tell you if the transactions have been classified correctly. In other words, the reconciliation tells you all amounts are in your accounting system but it doesn’t tell you if the amounts are in the right accounts. This is where financial statement review and analysis comes in to play as another important component of your monthly process. To ensure your financial information is complete and accurate, your monthly bookkeeping process must include reconciliations and reviews.