What Is Financial Reconciliation…?

…And Should You Be Doing It?

The short and easy answer is, “Yes!”. That’s it, blog over.

No, not really. While reconciliation is a relatively simple process, it is a vital one. In this blog, we’re going to be answering all the questions you’ve ever had about reconciling your business finances.

So, what is reconciliation?

The word itself has several meanings, but when it comes to the financial matters surrounding your business, it refers to the simple act of ensuring that the money spent and the money earned in a financial period matches and balances.

It’s a fundamental financial practice that you should do regularly to ensure the smooth running of your business’ finances.It can also be highly satisfying when you reconcile to a zero balance- in fact; reconciliation is my personal favourite part of bookkeeping!

The process of ensuring that your business’ bank statements match and balance with the transactions on your accounting software is straightforward but essential. It not only includes your business bank accounts (including savings, cheque, term deposits, credit cards) but other investment accounts and more.

In this blog, we will explore the importance of reconciliation and what you should be reconciling for your business.

Why Should You Reconcile?

Bank statements show an accurate list of all the financial transactions made over a specific period. They are essential to the final reconciliation process and ensuring correct reporting to the business management and the Australian Taxation Office(ATO), ensuring compliance.

Reconciling accounts is a way to identify any mistakes that may have been made. Human error can occur, so you need to ensure that what’s been entered into your accounting software matches what you have paid and received as per your bank statement.

Reconciliation smoothes the process of monitoring cash flow and liabilities, making it easier for you to plan for future expenditure to ensure the business’s long-term viability.

Reconciling bank accounts is surprisingly straightforward if you keep up with your transactions accurately. It feels great when you see a reconciliation balance of zero at the end of it because it means you’ve managed to reconcile all of your transactions!

What Should You Be Reconciling?

You should be reconciling the following accounts on a regular basis:

  • Bank accounts: Most bank statements show a running balance of your transactions, making it simple for you to keep track whilst ticking and reconciling. The opening balance on your current bank statements should match the closing balance of the previous reconciliation in your accounting software.
  • Credit card accounts: As with bank accounts, these show the expenses your business may have incurred during a specific period. It also shows the business liability to pay back the financial institution and interest incurred.
  • Loans: Regular reconciliation of the business, motor vehicles and equipment loans ensure that the payments are going through correctly and loans are being reduced.
  • Term deposit and other investment accounts: Ensure income such as interest, dividends earned and or fees are recorded and, in turn, reported.

Other reconciliations that are strongly advisable:

  • Pay As You Go (PAYG): Payable liability account to ensure that the liability amounts match actuals unreported and reported but not paid to ATO.
  • Superannuation Guarantee: Payable liability account to ensure that the correct liability amounts match actuals unreported and reported by not paid to the clearinghouse or funds.
  • Clearing accounts: Your software electronic clearing account, payroll clearing account should always be zero at the reconciliation if all have been paid.
  • EFTPOS Clearing Accounts: These should also be reconciled against the deposits in the bank statements, taking financial institution fees and undeposited funds into consideration.
  • Accounts Receivable: When you reconcile these accounts, they should match what your clients owe you.
  • Accounts Payable: Reconciling these accounts should match what you owe your suppliers.
  • GST Accounts: The balances in these accounts should match what has been reported on the BAS and what is owed to ATO, or what the ATO owes you.
  • Other Liability Accounts: It’s also advisable to reconcile other aspects such as childcare and salary packaging to ensure the payments to the respective entity have been made.

How Often Should You Be Reconciling Your Accounts?

At a bare minimum, always reconcile the main business bank accounts while preparing your Business Activity Statement (BAS).I recommend that you reconcile your accounts at least monthly to identify and quickly rectify any errors. Some of my clients reconcile daily and others weekly to monitor low cash flow.

What are some of the problems and solutions that can be identified while conducting reconciliations?

  • Conducting the above reconciliations will also assist with:
    • Identifying errors or missed transactions
    • Double entered transactions into the software,
    • Regular and one-off direct debits that having been recorded
    • Bank fees, interest direct credit, incorrect data entered
    • Tracking cheques not presented and dishonoured cheques
  • Ensure the opening balance of the statement period matches the closing balance of the previous reconciled period in your accounting software before you start reconciling. This will identify any transactions that might have been edited or deleted during the last period.
  • It’s easy to accidentally make errors while entering dates, especially at the start of a month or year; therefore, if the dates of the transactions in the accounting software does not match with those on the bank statement, they will need to be rectified.
  • Identify scams and/or unauthorised debits.
  • Small purchases that may have been forgotten about,g. buying petrol and failing to record it in the software.
  • Compare with the previous bank reconciliation report. Keep proof of your last reconciliation by printing reports to identify errors in prior or future reconciliations.

Seeing all the accounts reconcile will give you peace of mind that all your business transactions and reporting are on track.

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