BATT#7: Bank Reconciliations – Why We Do Them

Bank reconciliations, or matching what’s recorded in the accounting system to the bank statements, are a bit of a funny beast.  They’re very simple to do, but an extremely important step in bookkeeping and having accurate records.  I often see inexperienced bookkeepers skip steps or take shortcuts in bank reconciliations to save time only to cost themselves in the end.  As a result, I’m going to take you all through a bank rec primer in this post.

First Things First:  Bank Feeds vs. Bank Statements

In a cloud based world it is very tempting to skip the paper or digital bank statement and just work off of what is in the system.  You can run into serious problems if you’re never checking back to the “paper” statement (or PDF of course).  By checking against the bank balance we can ensure that broken bank feeds didn’t miss a transaction, software errors didn’t double count something, or other errors didn’t occur.  You’d be surprised how often small discrepancies are found by doing this.

This step becomes even more important if you have to manually import a bank statement into your system, as human error is obviously easy to have with any manual process.

Always remember, an accounting system will tell you that you’re reconciled when you’ve coded all the transactions in the system but that doesn’t necessarily mean that the bank is balanced to the external statement.


No Plugs Allowed

Sometimes things just aren’t working or small differences occur and you may be tempted to create a plug to balance the bank and just get things done.  DO NOT DO THIS!  Ever!  Seriously – never.

There is no such concept as immaterial when it comes to balancing cash.  If you can’t get the bank to balance by recording each transaction as they EXACTLY appear on the bank statement – you’ve got an error somewhere in your books that need to be found.  And you may say, well it’s just $1.  Fine – but if you can’t tell my WHY you have a $1 error then how do you know it’s not $1,000,000 going in one direction and a $999,999 error going the other way, offsetting to $1?  You must always know why you have differences.

That’s not to say they don’t happen.  Customers will routinely underpay or overpay by $1 or $2.  That can be dealt with using a minor adjustment feature in your system.  It’s not a plug, because you know specifically what invoice had the difference.  Let’s say, however, a customer overpaid by $659.  That’s an odd number, so I’d go back to the customer and ask if they were perhaps paying another invoice, or made an error on their end that needs to be refunded.  I certainly wouldn’t simply the plug the $659 as a minor error.


How To Fix It When Banks Don’t Balance

This is a very common issue.  The solution, while painstaking, is simple.  Unless you already know which transaction is the culprit (which you usually won’t), the simplest way to resolve a reconciliation that doesn’t balance is to go back to the paper statement and check that the system has each paper transaction, one by one.  If you do this, you’ll undoubtedly identify which transaction was double counted, missed, or numbers didn’t match.  It’s a fool proof way of solving the problem.


Unreconciled Items

Bank balances in the system don’t always match the bank statement because of timing differences and how accrual accounting rules work.  This leads to unreconciled bank items.  Unreconciled bank rec items are common.  These commonly include outstanding cheques (cheques cut but not yet deposited by who you sent them two) or transfers between banks that happened on the end of the month.  The latter you’ll typically only see between a bank and credit card because it takes a few days to apply a payment.

It’s fine to have these items on your bank reconciliation to explain the difference between the accounting balances and bank balances.  You must, however, be able to explain them.  For outstanding cheques ensure none are stale dated (beyond six months) or they must be corrected.  For outstanding transfers I recommend checking the subsequent months bank statement to ensure they’ve cleared within a few days of month end.

If an unreconciled item cannot be properly explained, it could likely be an error and must be corrected.


Sounds Complicated?

It’s generally not – the above are just some of the pitfalls you can encounter if you try and take shortcuts in the bank reconciliation.  Just remember, if you can balance your cash you’re well on your way to having correct books.  If you don’t (and especially if you let it drag on for months or worse yet, years) it will become a nightmare to untangle and could result in financial statement and tax return errors.




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