One way to detect any unusual transactions is by comparing your records against the bank records. This practice is known as bank reconciliation.
How does bank reconciliation work?
You reconcile your accounts by comparing record of balances and transactions to monthly bank statement. You will need to review each transaction to ensure that the amounts match perfectly. The bank statements should also show an ending account balance. Bank reconciliation is similar to balancing your checkbook. Both tasks are done for the same reason. Although you may see some slight differences, the differences must be properly explained. One good reason that your transactions may not match is when you write a check to a vendor. This will result in reducing your account balance accordingly. However, your bank will show a higher balance unless the outstanding checks hit your account.
Another reason you will see these differences is when an automatic electronic payment is paid into your account. If it appears on your account earlier than expected, discrepancies will be evident. There is no need to worry as long as the discrepancies can be accounted for.
The importance of bank reconciliation
Problems only get out of hand if accounts are not reviewed regularly. Bank reconciliation will enable you to:
Fraud cannot be easily caught unless you perform a thorough investigation by going through your records. Checks that are manipulated or duplicated is a sign of fraud. If checks are issued without authorization or there are frequent incidents of unauthorised transfers, you know that your employee is getting more than what he or she should be paid for.
There are issues that need your immediate attention, but as your business grows, you become busy taking care of other aspects of your business that you no longer have enough time at your disposal. Bank reconciliation helps you to prevent or identify problems by catching bank errors, ensuring that everything goes into your accounting system properly, keeping track of your outstanding checks, knowing how you much you have available in your bank account and more.
The best time to reconcile your accounts
Business owners must see to it that accounts are reconciled at least monthly. However, if you own a high-volume business where fraud is a risk, you will need to perform bank reconciliation more than once a month. Some businesses even reconcile their bank accounts daily to prevent any unauthorised transactions.
How to reconcile your accounts?
There are many ways you can perform bank reconciliation such as creating a bank reconciliation statement. The first step is to match your transaction and compare your balance at the end period which can be daily, monthly opr quarterly. Your bank should give you access to your online account so you can view and download bank transactions regularly.