The Importance of Reconciliation
The reconciliation of bank accounts
It’s true that in life it is usually healthier to forgive wrongs done to us and make up with those who have offended us. Taking everything back to an equal and even footing. That, in accounting terms, is what we are doing when we reconcile our cash, bank and credit card accounts: making what we think the business has or owes and that which it actually has or owes at any given moment the same. Bringing them into parity, starting again as it were before the next financial period. It is crucial for a business to keep on top of what it has in money terms and what it owes because that is the essence of cash flow.
So, on a regular basis we should reconcile our cash, bank and credit card accounts. If most of your transactions go through the business current account you should look to reconcile that every time you get a statement through which is probably once a month. For petty cash or credit card accounts, reconciling prior to producing a balance sheet is probably enough, but it will depend on the number of transactions.
What precisely is bank reconciliation then? You will have recorded in a cash book, a spreadsheet or accounts software package both payments out to suppliers and receipts in from customers. For information, the first of these (money out) is a ‘credit’ to our current account, and the money in is a ‘debit’. Confusingly, when we come to look at the bank statement it is recorded the other way round because the statement is issued from the bank’s point of view. What we need to do is to check that what is recorded in our records (‘the books’) is matched by what appears on the bank statement. This process of checking and verification is called ‘reconciliation’.
Reconciliation will throw up discrepancies and each of these needs to be looked into. There are various reasons why such discrepancies arise, such as:
- Direct Debits, Sanding Orders or bank charges may not have been entered in to the ‘books’. If so, they should be recorded/ entered.
- Other transactions may have been forgotten or they may have been incorrectly recorded. Again, these should be recorded or amended.
- Some transactions may not yet have appeared on the statement especially if they are cheque payments/ deposits. In this case, those payments/ deposits are ‘uncleared’ and an adjustment can be made to the overall figure in the ‘books’.
Tallying the transaction with the bank recorded transaction – or matching – does not have to be exact in every sense: the date, for example, is likely to differ by a few days in some cases. However, the numbers should be the same! Once the transactions are matched they can be ticked off or marked in some way. Reconciliation is complete once the difference between the ‘books’ and the bank statement is 0, allowing for uncleared items.
Prior to year end, every cash, bank or credit card account should be fully reconciled so that an accurate Balance Sheet (which shows what the business owns and what it owes) can be drawn up. At this point, uncleared transactions are recorded as monies owed by ‘debtors’ or to ‘creditors’.
QuickBooks takes the strain
The above process can seem laborious and time consuming. However, one of the great advantages of running a decent accounting software package such as QuickBooks or QuickBooks Online is that much of the reconciliation can be done automatically thanks to bank feeds. For example
- in QuickBooks desktop (Pro and Premier), it is straight forward to link up to feeds from most of the UK clearing banks. As a result, the bank statement data can be imported regularly and QuickBooks then matches the transactions for you. Any discrepancies are obvious and can be dealt with.
- in QuickBooks Online it is possible to set up a link to your bank account so that the matching is done seamlessly – it is even possible to use the bank account as the primary way of entering transactions into QBO.
Once the account is reconciled QuickBooks will offer a Reconciliation Report that clearly shows the uncleared items which can be looked into or carried over to the next reconciliation period.
