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Bank Reconciliations Explained | Supporting Strategies

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Bank Reconciliations 101: What Business Owners Need to Know

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Your company's bank statements can provide a wealth of vital financial intelligence — if you know what to look for. Learn more with these bookkeeping tips.

A bank reconciliation is, by definition, "the act of making financial accounts consistent." Sounds straightforward enough. But in practice reconciliations can be complicated. This is particularly true in businesses that are subject to stringent regulations, such as law practices. (To further complicate matters at law firms, IOLTA calculations — interest on lawyer trust accounts — require reconciling three sets of ledgers: the trust ledger, the client ledger and the bank ledger.)

Trying as they may be, reconciliations can also yield a ton of valuable financial intelligence. Insights gained from that intelligence, combined with the discipline and best practices that regular reconciliations instill, provide many benefits. Timely, consistent reporting builds confidence among board members, for example. Most important of all, sound financial controls, and a built-in system of checks and balances, can protect your business from fraud.

But what exactly are reconciliations, and what's the key to doing them right? Let's take it from the top.

Reconciling Theory With Reality: Key Bookkeeping Tasks
As a first step in reconciling your company's accounts, your bookkeeper must make sure all financial transactions for a specified period of time (usually a month) are properly documented. (Most companies now record all their financial transactions on software programs, and many store that information in the cloud.) Transactions include withdrawals, deposits, bank charges and paper checks.

Then it's a matter of comparing the company's ledger with the bank statement for the same period of time to see if they match. The degree of difficulty depends to a large extent on the size of your business and the number of monthly transactions that occur. It's not uncommon for the company's financial statement in a particular period to reflect payments or deposits that have yet to hit the bank; it's important to account for this "transaction lag."

What Your Bookkeeper Looks for When Reconciling Accounts
See below for a quick look at what your bookkeeper should be on the lookout for when performing a reconciliation. Keep in mind: It's extremely important that the bookkeeper performing the reconciliation be a second set of eyes — not the same person responsible for writing checks, making charges against the company's accounts and so on.

  • Out-of-order payments: A delay between the time a payment was made and the time the bank recorded it doesn't necessarily mean that something is amiss, but it's worth investigating why the chronological sequence was interrupted.

  • Payments to unfamiliar vendors: Again, this doesn't necessarily indicate wrongdoing. The unfamiliar name might simply be a known vendor's parent company. But if your bookkeeper determines the unfamiliar vendor is an unauthorized vendor, that's a strong indication of an embezzler at work. A particular red flag is if the unauthorized vendor has a name similar to that of an approved vendor, which makes it harder to notice at a glance. In general, it's a good idea for every company to limit its vendor list and have the bookkeeper confirm any new vendor that appears.

  • Unauthorized debits — or unauthorized credits: It goes without saying that unauthorized debits should immediately be investigated. But what's the problem with unauthorized credits? Why look a gift horse in the mouth? Because sometimes a hacker or other bad actor will make small credits or deposits to test the integrity of your reconciliations. If those bad actors think you're not paying close enough attention, they could then attempt a fraud scheme.

  • Irregularities involving paper checks: Paper checks are a popular target for embezzlers because they reveal the company's routing and bank account numbers. That's one reason many companies have switched to automated clearinghouse (ACH) transactions, which transfer money directly between accounts without the need for a check. Another reason: ACH transactions never get lost in the mail or misplaced on someone's desk.

  • Unexpected bank or financial entity charges: Your bank statement should never produce an unpleasant surprise. Those unexpected charges could be an indication of fraud — or an example of those "hidden fees" you sometimes hear about in banking commercials. If that's the case, you might want to move your business elsewhere. (Note: A good bookkeeper will make the company controller or CFO aware of any expenses they spot that can be reduced or even eliminated.)

  • Financial activity that doesn't match the company's forecasts: If you had a month or a quarter that was significantly worse (or better) than you anticipated, you need to figure out why. A bank reconciliation can yield vital insights and inform important strategic decisions. Was there a supply chain interruption that caused a spike in the cost of raw materials? You might need to look for alternative sources. Did you end up quickly selling out your inventory in a particular region? That's a sign of a missed opportunity.

  • Incorrectly categorized expenses or deposits: It's crucial that all monthly transactions be correctly recorded against the chart of accounts in order to produce meaningful reports for company stakeholders.

What If the Account Doesn't Reconcile?
Good question. The first step is to see when the last reconciliation was done. If it was the previous month, any issues shouldn't take long to resolve. But if the account hasn't been reconciled in months — and that happens more often than you might think — the bookkeeper will have to go back to the most recent reconciliation and painstakingly bring the account up to date a month at a time.

That can be a long, difficult process, particularly at companies that transfer payments between two accounts. Or law firms that must reconcile three IOLTA accounts, all under the watchful eye of various regulatory agencies.

Regular Bank Reconciliations: A Bookkeeping Best Practice
From helping to protect your business from fraud to providing financial intelligence when you need it, performing bank reconciliations on a regular basis is a bookkeeping best practice that will improve the integrity of your financial data.

At Supporting Strategies, our experienced, U.S.-based professionals use secure, best-of-breed technology and a proven process to provide a full suite of bookkeeping and controller services. Are you ready to learn how you can move your business forward? Contact Supporting Strategies today.

John Gleason

Author:

John Gleason

John Gleason is Managing Director of Supporting Strategies | North Shore, MetroWest, Central & Western MA. John’s team helps Massachusetts businesses pursue success by providing professional bookkeeping and controller services.

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This website is created by Supporting Strategies to provide general bookkeeping and accounting information only. Supporting Strategies does not provide tax, legal or accounting advice, and the information contained herein is not intended to do so. As such, the information provided should not be used as a substitute for consultation with professional tax, legal, and accounting advisors, and you should consult with a tax, legal and accounting professional before engaging in any transaction.