When using accounting software, you might find that your bank balance begins to drift away from what you expect it to be. This is usually because of a missing transaction or two, or because of bank fees that haven’t been included.
It’s best to catch and correct these small discrepancies before they begin to accumulate into something bigger and harder to catch.
What is bank reconciliation?
Simply, bank reconciliation is checking your accounting records and ensuring that they match the bank’s records.
Think of it as double-checking your work to ensure that it’s accurate and error-free.
Without this check, your records could drift from the expected, and you could misreport figures to HMRC, leading you to pay more tax than expected or be on the hook for additional tax once the error is caught.
Why regular bank reconciliation matters for small businesses
Regular bank reconciliations are important for small businesses because they help you catch small accounting errors before they snowball into larger issues that are harder to track. There are other reasons to use bank reconciliation, such as:
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Accurately tracking your cash flow by knowing exactly what’s come into and left your account. Once you know your cash flow accurately, you can make informed business decisions.
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Quickly spot and correct errors, leading to an accurate overview of your account. This isn’t only vital for tracking the amount of tax owed, but it can also help you keep track of fraudulent activity in your account.
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Gain peace of mind that your reporting to HMRC is accurate and is a true representation of your business.
How can you carry out a bank reconciliation?
The easiest way to carry out a bank reconciliation is to compare overall balances for a set period. If the balances match, the transactions within the period are likely correct.
If you’re reconciling your accounts for the first time, you may need to go back to the beginning of your records to make sure everything matches. However, if you’ve previously reconciled your accounts, you know there is a set period that’s correct, and there’s no need to double-check it, meaning you can go from there.
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Start by comparing the opening and closing balances of the bank account and your records for a set period to see whether they match. For example, if your accounting record shows January with an opening balance of £10 and a closing balance of £1,000, your bank account balances should match.
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Then identify any discrepancies in these amounts. For example, if your bank shows a closing balance of £989, you know there’s £11 missing from the period.
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If you find a discrepancy, track down any missing transactions that could be causing it and add them to your accounting software, along with supporting documents such as invoices or receipts.
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Reconcile your final balances to ensure they match, then repeat as necessary.
You may have multiple missing transactions within the period, and although unlikely, they may cancel each other out. For example, you could have a missing £10 leaving your account and a missing £10 coming into the account. If you suspect this has happened, you need to check all transactions within the period, rather than simply checking that the final balances are correct.
How QuickFile can help
QuickFile accounts include a bank reconciliation tool that can make this process easier. And, as a bonus, if you’re using automated bank feeds, the process is easier again.
When using automated bank feeds, your transactions are automatically pulled in from your bank, meaning you don’t need to keep on top of it as much, as it’s less likely transactions will be missed during the import; however, it’s still good practice to periodically check, as transaction fees can sometimes be missed.
To find out more about running the reconciliation tool, check out our support article: Reconciling your bank.
Is it a big problem if the balances don’t perfectly match?
When reconciling your bank account, the two sets of information may not match perfectly. There are two harmless reasons why this might be:
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Card transactions have been made but not cleared yet, so there may be an accounting record, but nothing is showing in the bank account
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Bank fees have been applied, but there’s no transaction in your accounts for them yet
Although these two instances are easy to resolve, there may be times when you need to investigate why the records don’t match. Such as:
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Recording errors by either the bank or the bookkeeper
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Fraudulent activity, such as withdrawals being made which are not authorised by the business and therefore not recorded by the bookkeeper
If you don’t perform regular bank reconciliations, missing or fraudulent transactions can slip through and cause problems down the line.
Still unsure about Bank Reconciliation? Check out our YouTube Channel for more information about bank reconciliation: How to reconcile your bank with QuickFile