An essential accounting activity that Small Businesses should never overlook is cash reconciliation, also known as bank reconciliation. And yet, I have repeatably seen businesses skipping the monthly bank reconciliation. This is a process where the bank statement for a given month is compared to the accounting system’s transactions for the same month. Ordinarily, the two should match, except for any ” in transit transactions.” An example of an “in transit” transaction is a check that shows up in the accounting system as processed for payment to a vendor, but the check does not show up on the bank statement, implying that it has not yet been cashed by the vendor.
Two common reasons why cash reconciliations are not performed regularly might be that either their importance is not seen or that one simply does not know how to complete the step as part of the monthly close process. The cash reconciliation can help discover missing, duplicate, or incorrect transactions. To help elaborate on the importance of a cash reconciliation, we will briefly examine each transaction activity.
Missing Transactions
A cash reconciliation can be used to spot missing transactions in the accounting system. This may happen when a payment, say a check from a customer, is received and entered into the accounting system (either to relieve accounts receivable or increase income), but by mistake; the check is not submitted to the bank. In this case, when the bank statement is compared to the accounting system, the system will show more money (or deposits) than the bank.
Duplicate Transactions
The finding of a duplicate transaction is another example of a benefit of cash reconciliation. I have seen this error happen for various clients. For example, this may occur when the accounting system shows an expense coming out twice from the cash account or a duplicate cash receipt. Without a cash-to-bank reconciliation, such transactions can go undetected, meaning that cash, income, or expenses are either overstated or understated. Because daily business operational decisions are based partly on the amount of cash or the net income reflected on the financial reports, overstated or understated numbers can directly lead to improper decisions, leading the business in the wrong direction.
Incorrect Transactions
A third type of transaction that a cash reconciliation can unveil is incorrect transactions posted in the accounting system. For example, if the accountant receives a payment from a customer and manually receives it in the accounting system but by mistake enters it for $4,400 instead of $4,004 as shown on the check that is deposited at the bank. When a cash reconciliation is performed, the error will be seen since the accounting system will show a higher deposit than the bank, leading to research and discovery of the incorrect transaction.
These are just three examples of where I have seen a cash reconciliation save the day. There are other ways a reconciliation can minimize or eliminate transactional errors on a company’s books. Contact your CPA or accountant if you are unsure how to perform a monthly cash-to-bank reconciliation. The worst thing a Small Business owner can do is not complete monthly reconciliations. Remember, accurate financial reports help make the best operational decisions from a financial standpoint.
DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting, or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.
