With online access to bank and credit card accounts, I am seeing a massive departure from the standard business practice of reconciling accounts on a monthly basis. It’s an easy trap to fall into and the fees (bank fees) can be extraordinary.
If you have business checks or if you have costs that automatically come out of the account you use for business, you need to setup a bookkeeping system. No matter how good you think your memory is, the fact is that at some point you’re going to forget about the check you wrote for supplies or (yikes!) rent or the EFT you setup to pay your insurance it’s going to clear the bank on the worst possible day.
Like the day you land an awesome contract and purchase a bunch of supplies to get it done (because your online bank balance says there’s enough in there) and there’s a whopping $1,000 left in the account. All it takes is a few lagging transactions to eat up that buffer and land you in the hole. I’ve seen this happen hundreds of times, and it always results in overdraft fees and non-sufficient funds (NSF) fees.
The bank might work with the business owner once or twice if this happens infrequently, but at a certain point the bank stops refunding the fees and the owner has to eat the costs for the bank to cover the account.
Talk about taking all the fun out of “making a living”.
The solution to this maddening cycle is to keep a check register. If you want to go old-school, then pull this sucker out of your box of checks:
It’s fairly self-explanatory. Enter the date, the check number (of EFT for Electronic Funds Transfer), the payee (the name of the person you paid or paid you), the amount of the payment or deposit, and the ending bank balance. If you’re somewhat computer savvy and want to kick it up a notch, use Excel or Numbers, or Google Sheets to keep track of your transactions. You’re welcome to download and customize the basic Excel spreadsheet I designed for this.
If you find you can’t keep up with the number of transactions going in and out of your account(s) and you keep missing things, I would recommend setting up a bookkeeping system in QuickBooks or Quicken that can automatically link to your online bank account to be sure you’ve entered everything.
Regardless of what system you use to keep track of your transactions, you will want to compare what you’ve recorded with what appears on your bank statement at least once a month. The easiest way I’ve found to do this is to layout the record of what I’ve recorded (the check register) side-by-side with the monthly bank statement.
Start with the oldest transaction you recorded and see if it appears on the bank statement. If it does, then highlight it on the bank statement and in the check register. If it doesn’t appear on the bank statement, then circle it in the check register. Likewise, if it doesn’t appear in the check register, then circle it on the bank statement. When you’re done with this step, you’ll have something that looks like this:
Next, you’ll want to add any transactions that cleared the bank that aren’t in your register. In other words, you’ll want to enter the transactions that are circled on the bank statement in your check register.
Then you can highlight it in the register:
and on the bank statement:
To check your work, take the bank statement ending balance, subtract any circled payments in your register, and add any circled deposits. These are known as “outstanding” or “uncleared” checks and deposits:
Reconciliation Report
Bank statement ending balance: $8,340.00
Uncleared checks: $800.00
Uncleared Deposits: $0.00
Register balance as of 07/31/18: $7,540.00
If the register balance you calculate matches your actual register balance (see highlighted below), then you’re done! You’ve reconciled your account “to the penny” as bookkeepers and accountants are fond of saying.
If it doesn’t match, you will need to go back through your transactions to be sure everything actually matched-up. Here are a couple tips about resolving bank reconciliation differences:
- If you’re lucky, you might be off by just one transaction (e.g. you’re off by $35.49, which happens to be the same amount as the gas you bought on the 18th).
- If you’re off by a number that’s divisible by 9, then one of the numbers in your register might be mistakenly transposed (e.g. 89 instead of 98 or 54 instead of 45).
That’s it! If you need help, it’s literally what I do for a living. Drop me a line and I’ll get in contact with you as soon as possible.