Running a small business means keeping track of many financial transactions, from customer payments and deposits to bills, expenses and bank fees. But recording transactions in your accounting records is only part of the process.
Bank reconciliation is the process of comparing your business bank statement with your bookkeeping records to make sure the transactions and balances are accurate.
For small businesses, regular bank reconciliation can help identify missing transactions, duplicate entries, errors and other differences before they become bigger bookkeeping problems.
What Is Bank Reconciliation?
Bank reconciliation is a bookkeeping process where you compare the transactions recorded in your accounting system with the transactions shown on your bank statement.
The goal is to make sure that the balance in your bookkeeping records agrees with the actual activity in your business bank account.
For example, your accounting records may show that your business bank account has a certain balance. When you compare those records with the bank statement, you may discover that:
- A bank fee has not yet been recorded
- A customer payment has been deposited but not entered into the books
- A transaction was entered twice
- A cheque has not cleared the bank
- An automatic payment was missed in the bookkeeping records
- A transaction was recorded for the wrong amount
Finding these differences allows them to be investigated and corrected.
Why Is Bank Reconciliation Important for a Small Business?
Regular bank reconciliation helps keep your bookkeeping records accurate and up to date.
Accurate financial records are important because they help business owners understand their financial position and support income and expense reporting. The CRA also identifies bank statements and bank reconciliation statements among the types of business records businesses may need to maintain.
1. It helps find bookkeeping errors
Small errors can accumulate over time. A transaction entered twice, or a missing expense, may not seem significant on its own, but multiple errors can make your financial reports unreliable.
Regular reconciliation gives you an opportunity to find and correct these differences.
2. It helps you understand your cash flow
Your bank account gives you a real-world view of money moving in and out of your business.
When your bookkeeping records are kept current and reconciled, you have better information for understanding your available cash and upcoming financial obligations.
3. It helps keep financial statements accurate
Financial statements depend on accurate bookkeeping records.
If transactions are missing or recorded incorrectly, reports such as your income statement and balance sheet may not accurately reflect your business.
4. It can make tax preparation easier
Well-organized bookkeeping records can make year-end tax preparation more efficient.
The CRA requires businesses to maintain records that support their income and expense claims, and organized records can also help businesses identify expenses and other amounts that may need to be considered when preparing tax returns.
How Does Bank Reconciliation Work?
The reconciliation process generally involves comparing your accounting records with the corresponding bank statement.
A typical process may include:
1. Obtain the bank statement
Start with the statement for the period you’re reconciling.
2. Compare transactions
Compare deposits, withdrawals, payments, transfers, fees and other transactions on the bank statement with the transactions recorded in your bookkeeping system.
3. Identify differences
Look for transactions that appear on one record but not the other, as well as duplicate or incorrectly recorded transactions.
4. Investigate the differences
Determine why the difference exists. Some differences may be timing-related, while others may require a bookkeeping correction.
5. Make necessary adjustments
Record missing transactions or correct errors where appropriate.
6. Confirm the accounts reconcile
After the differences have been addressed, the bookkeeping records should agree with the bank activity, taking legitimate timing differences into account.
How Often Should a Business Reconcile Its Bank Account?
For many small businesses, monthly bank reconciliation is a practical approach.
Reconciling regularly means errors and missing transactions can be identified sooner rather than several months later.
Businesses with a high volume of transactions may benefit from more frequent reconciliation.
The important thing is to avoid allowing unreconciled transactions to accumulate for long periods.
What Happens If Your Books Don’t Match Your Bank Statement?
A difference does not necessarily mean that something is seriously wrong.
There can be legitimate timing differences between your bookkeeping records and your bank statement. For example, a payment may have been recorded in your books but may not have cleared the bank yet.
Other differences may result from:
- Missing transactions
- Data-entry errors
- Duplicate transactions
- Bank charges
- Incorrect transaction amounts
- Unrecorded transfers
The difference should be investigated rather than simply changing the bank balance in your accounting records.
Can a Bookkeeper Handle Bank Reconciliation?
Yes. Bank reconciliation is a common bookkeeping task.
A bookkeeper can compare your bank activity with your accounting records, identify differences, record missing transactions and help keep your books current.
For a small business owner, having regular bookkeeping and reconciliation completed can reduce the amount of time spent reviewing transactions and trying to identify old discrepancies.
If you are looking for bank reconciliation services in Windsor, this can be included as part of a broader small business bookkeeping service.
Bank Reconciliation for Small Businesses in Windsor
At Windsor Tax & Accounting Services, bank reconciliation is part of our small business bookkeeping services in Windsor, Ontario.
Regular bookkeeping can include reviewing financial transactions, reconciling accounts, organizing records and preparing financial information for reporting and tax purposes.
If your business books are behind, your bank balance doesn’t match your accounting records, or you simply want your bookkeeping kept up to date, professional bookkeeping support can help.
Learn more about our [Small Business Bookkeeping Services in Windsor, Ontario] and see how we can help keep your business records organized.
Frequently Asked Questions
Is bank reconciliation necessary for a small business?
Bank reconciliation is an important bookkeeping practice because it helps identify differences between your accounting records and bank activity. Regular reconciliation can help keep financial records accurate.
How often should I reconcile my business bank account?
Monthly reconciliation is a common approach for small businesses. Businesses with more frequent transactions may choose to reconcile more often.
What if my bank reconciliation doesn’t balance?
Start by looking for missing transactions, duplicate entries, bank fees, timing differences and incorrect amounts. The difference should be investigated before making adjustments.
Does bank reconciliation help with taxes?
Accurate bookkeeping and organized records can make tax preparation easier. CRA requires businesses to keep records that support their income and expense claims.
Can a bookkeeper reconcile my bank account?
Yes. Bank reconciliation can be part of a small business bookkeeping service.
Final Thoughts
Bank reconciliation is a relatively simple bookkeeping process, but it can play an important role in maintaining accurate financial records.
By regularly comparing your bookkeeping records with your bank activity, you can identify errors sooner, keep your financial information current and make it easier to prepare for reporting and tax obligations.
For small businesses in Windsor, regular bookkeeping and bank reconciliation can help keep financial records organized throughout the year.
Source: Canada Revenue Agency — business records and record-keeping guidance.
This article is provided for general informational purposes and is not intended to be accounting, tax, or legal advice. Business circumstances vary, and professional advice may be appropriate for your situation.