Why should you reconcile your bank accounts?

In the accounting world, one of the main activities each month is reconciling bank accounts. The point of reconciling your bank accounts is to verify you’ve entered all the transactions listed on your bank statement correctly. It’s how you discover mistakes – yours or the bank.

Missing or duplicate transactions are the most common issues discovered during the reconciliation process. Transactions that are missing could mean income or expenses are understated. That means you are not seeing an accurate picture of your business success. It also means your tax return will be wrong. A missing $1,000 transaction means your income is overstated and could translate to paying more in taxes.

If you are missing deposits, you could look foolish when you ask a client why they didn’t pay when the issue is really that you forgot to record their payment. Deposits that are not recorded also mean your income is understated.

If you are missing multiple deposit and expense transactions, your income and expenses will be wrong. You’ll be making decisions based on wrong information and paying taxes based on wrong information.

What’s that, you say? You have connected your bank account to Quickbooks or Xero? That’s great! Allowing your bank to automatically send all transactions to your accounting software can save a lot of typing and make transactions easier and faster to record. You know there’s a “but” coming, right?

Like I said, the automated bank feeds are great time savers. But the bank feeds are not perfect. Banks can skip transaction or even send duplicate transactions to your accounting software. Even worse, they can send deposit transactions as expenses and expense transactions as deposits.

The point of reconciling your bank account in Xero or Quickbooks to the bank statement issued by your bank is to verify you and the bank agree on the transactions. It’s how you find mistakes – yours or the bank. Those outstanding items in the bank account in your accounting software from months ago? They’re problems – duplicate transactions and other mistakes – that mean your financial statements are wrong and your tax return is wrong.

The bank balance in Xero or Quickbooks should always match your bank. The only exception is transactions from the last few days that haven’t cleared the bank. Everything else is a problem that is giving you a false picture of your business finances.

Want some help reconciling your bank accounts? Schedule your free strategy session now!