Your current bank account balance doesn’t actually represent your available cash. If you have a few sizable checks outstanding, your business checking account can easily go into the red.
By maintaining separate accounting of your transactions, and performing a monthly bank reconciliation, you can understand your cash flow and true cash position. The bank reconciliation process is similar to balancing your checkbook: It reveals any erroneous or missing entries so you can be confident that your cash balance is correct. Here are the steps to follow.
1. Compare Closing Balances From Your Bank and Your Books
You should always compare your bank statement and accounting balance — also known as your book balance — side by side and adjust transactions until both cash balances match. Most accounting software has a reconciliation module that allows you to enter the ending cash balances of your bank account to assist you with the reconciliation process. If you don’t have that, print out the month’s transactions on paper to compare them or export them into a spreadsheet program.
2. Add Bank-Only Transactions to Your Book Balance
There are usually some monthly debits and credits your bank tacks on that you didn’t account for in your books. Add positive transactions — like a monthly interest payment from your bank — and subtract negative transactions — like bank charges and bounced check fees — from your book cash balance.
It’s pretty easy to spot these bank-initiated transactions. There will only be a few, and they are often grouped together at the bottom of your bank statement.
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