Notes

Reconciling bank accounts refers to comparing bank statements with spending and earning statements to ensure they match. See how accuracy is maintained through business transactions and learn the reasons behind the process of reconciling the books.
Maintaining Accuracy
From balance sheets to master budgets, you do it all. Your accounting system has kept managers accountable, suppliers happy, and executives pleased since you first implemented it weeks ago. Simply put, you know where every dollar and every cent is going to and coming from in your organization.

At least that's what the books say.

You'd better watch out - a bit too smug of an accounting job and you may find yourself unable to catch an error that throws everything off. Luckily there is a solution, and one you should regularly do. By reconciling the bank accounts, you double check accounting books with respect to the actual bank accounts. In this lesson, we'll learn why it is so important to reconcile bank accounts with spending and earning statements, as well as how to do it.

Why Bother?
First, let's take a look at some reasons that should explain why it's so important to reconcile your statements.

People make mistakes. Whether it is you, a customer, a vendor, or the bank, mistakes happen in business. If you didn't check the accounts, you might not have a way of recognizing that the mistake happened. Bank reconciliation gives you the opportunity to go over the details of your spending again so that you can catch small errors before they become bigger ones.

Almost as annoying as errors are bank fees. Banks now make billions of dollars a year off of fees alone and are always looking for a way to sneak new ones in. In fact, some banks even charge for making deposits! As banks may not always send out an invoice whenever a fee occurs, you've got to watch out for these attempts to take more of your money.

Finally, there is always the chance that someone has done some unauthorized spending out of the account. While much of these is accidental in nature, such as a vendor charging too much for goods, there can be examples of fraud or theft. As a result, it's wise to make sure that whoever reconciles the accounts is not also the person who handles the routine bookkeeping. That would allow them to cover up fraud easily.

Process
So now that you're convinced of the need to reconcile the books, how do you do it? Before we get too far ahead of ourselves, you should do it at least once a month, or whenever large amounts of money enter or leave your possession. When it comes time to do it, however, you've got two choices.

If you have a solid suite of accounting software, chances are that the applications will simply do it for you. Give the program access to your bank accounts, and the software will analyze your books.

On the other hand, If you don't have such software, you'll have to go through your bank statements one at a time and match each expense and each credit up to a known expense or income source. It goes without saying-- I hope you saved your receipts.

Whichever method you decide on, make sure that you do this for all of your bank accounts. Many companies spread their money through numerous accounts, if not numerous banks. When reconciling the accounts, you need to make sure you examine all of them.

That said, there are two other aspects of actually reconciling the accounts that are worth mentioning to save stress later. The first of these is recognize that some items may still be in transit and not reflected in the latest bank account paperwork. In transit funds are those monies that have not yet been credited by the bank to an account. This is true for individuals too - if you have transferred money from one bank to another, chances are it takes a few days for the transfer to come through. Also, if you've ever written a check only to have the recipient not cash it, you can understand how frustrating this can be when balancing your own check book.

Further, you must also be aware of smaller changes to the account. Earlier we talked about the bank sneaking fees, but what if the bank suddenly paid interest for money you had left in the account? That would be enough to throw off your numbers. By reconciling the bank account, you have the chance to look for those instances and correct them.