Keeping accurate financial records is essential - not only to keep your business running smoothly, but for making informed decisions as well. A crucial part of this is bank account reconciliation. But what does this actually entail? In this blog, we’ll explore this in more detail and look at why it is an important part of running a business.
Understanding Bank Account Reconciliation
The term ‘reconciliation’ might seem unfamiliar, but simply put, it involves ensuring that every transaction in your business bank account is accurately recorded in your accounting system.
This involves categorising, matching and accounting for each transaction.
So why is this so important? Proper reconciliation ensures that your financial statements are accurate and reliable and therefore provide a true reflection of your business’ financial health.
Setting Up Bank Accounts in Your Accounting Software
Setting up every bank account in your accounting software is usually a straightforward process but it is also an essential one. It’s important to include not only your primary bank accounts, but also accounts relating to credit cards, mortgages, loans and payment systems like Stripe.
It’s therefore vital that every month you check that all your bank accounts are correctly set up in your accounting software and that every transaction within each account is fully reconciled.
Let’s now take a look at the process of reconciliation.
Matching Up Transactions
The process of reconciliation involves matching the deposits in your bank account with the corresponding sales invoices. For example, when a customer makes a payment, this needs to be matched to the invoice you originally issued them.
In the same way, all expenses such as bills and purchase invoices, must also be accurately matched.
And if you handle payroll, then it’s particularly important to ensure that all payroll transactions are properly categorised. This includes salaries, national insurance contributions, PAYE deductions and pensions.
Tracking Your Purchases
If you or anyone in your business uses the company card, it’s essential that receipts are collected for each purchase - especially if you’re VAT registered. Likewise, for any purchases over £250, always ask for an invoice that clearly outlines the VAT breakdown. If you can get into the habit of keeping detailed documentation for every transaction, you’ll be doing yourself a huge favour when it comes to submitting your VAT Return each quarter and preparing your accounts at the end of your financial year.
In your accounting system, make sure that everything is correctly categorised - this includes bank charges, payment fees, interest charges. This helps ensure that your financial reports are accurate and that all transactions are properly reflected in your records.
Verify Bank Feeds
When setting up your accounting system, you’ll be asked to automate your bank feed so that all transactions are visible almost instantly. And whilst this is very useful, it’s not infallible.
We always advise clients to cross-check their accounting system’s balances against their actual bank statements at the end of each month to ensure accuracy and avoid discrepancies. It’s far easier to spot these if you do this regularly, rather than waiting until the end of the year and having to review 12 months worth of transactions to find where things have gone out of sync!
Be Clear on Your Financial Status
Reconciling your bank accounts gives you a clear and accurate understanding of how your business’ financial health. Managing every transaction may feel like overkill at first, but it’s an important habit to get into as it brings you much closer to your business finances.
So block out time in your calendar every month to reconcile all your accounts and match up transactions to the relevant invoice or receipt. Encourage your staff to always collect receipts and invoices when making purchases so that you can make the entire process as pain-free as possible!
By following these practices, you’ll have a precise and up-to-date view of your business’ finances, which ultimately leads to more informed decision-making for you and smoother day-to-day operations.
Are you a company director navigating the complexities of month-end financial management?
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Long White Cloud Accounting is based in Sutton, South London and serves established limited company service-based clients in the Greater London area. Led by Kath Vincent, we provide high-quality bookkeeping to keep you on top of what’s happening in your business each month. Looking for bookkeeping support? Click below to book a chat with Kath.
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