There are many reasons why an entrepreneur should learn how to do bank reconciliations according to Edmonton bookkeeping. But one of the most important reasons. Is it can help them avoid spending more money than they have in their business.
The reason why this is. Is because if entrepreneurs are looking at their bank account balance. In order to make financial decisions. They could easily end up spending more money than they have in their business. Which could cause them to run out of money.
And while some businesses can recover from running out of money. For others, and depending on how much money it is. It can actually cause them to fail in business.
In fact, while 50% of all Canadian entrepreneurs eventually fail. Industry Canada says the second most common reason why. Is because entrepreneurs run out of money in their business.
Therefore, entrepreneurs who are looking at their bank account statement instead of a bank reconciliation. In order to make financial decisions. Are putting their business at risk. And could end up running out of money in their business. And cause them to fail.
The reason why entrepreneurs need to look at a bank reconciliation. Instead of their bank account balance. Is because the bank account balance. Will not show them how much money they have in their business. Once pending transactions have cleared their account.
Pending transactions can include electronic fund transfers that an entrepreneur has scheduled. Checks that they have written, but have not cleared the bank account yet. It can also include debit and credit card transactions. And even deposits made into a bank using an ATM.
All of these different transactions might not show up in the bank account statement or bank balance immediately. Therefore, if entrepreneurs are looking at their bank statement in order to make decisions. They could very easily spend more money than they have.
An example of this says Edmonton bookkeeping. Is if entrepreneurs look at their bank statement, and see that they have ten thousand dollars in their bank account. They might make an asset purchase for ten thousand dollars.
However, if they look at their bank reconciliation, they would see that they have eight thousand dollars worth of checks that are waiting to be cashed, and an electronic fund transfer for two thousand that has not cleared their account yet.
Therefore, if they purchase that ten thousand dollar assets. They could end up causing all of those checks and electronic fund transfers to bounce.
Therefore, learning how to do a bank reconciliation is extremely important. So that entrepreneurs can make more informed, and therefore more fiscally responsible financial decisions in their business.
If entrepreneurs are having a hard time figuring this out. They can always contact their accountant, or their Edmonton bookkeeping company.
Who would be more than happy to explain the process to them, and help them understand how to do a bank reconciliation properly. So that they can ensure that they have the money in their business before making any financial decision.
Do you have a need for a full-time Edmonton Bookkeeping service?
Many entrepreneurs may not know why bank reconciliations are important says Edmonton bookkeeping. Which is why they do not learn how to do these early on in their business.
But it can be is very important for entrepreneurs to realize. That bank reconciliations are designed. So that entrepreneurs know how much money they have in their business. After all pending transactions have taken place.
In order to do a bank reconciliation properly. Edmonton bookkeeping says an entrepreneur needs to have their current bank statement. As well as their most recent bank reconciliation.
The first step is to verify that the starting bank balance matches the statement balance of the bank reconciliation. If it does not, there is an error that likely occurred after the last bank reconciliation.
This error is typically if an entrepreneur has accidentally posted transaction as cleared for a future date. If this is the case, entrepreneurs can go into their accounting software very quickly and fix that mistake. So that they have the correct starting balance matching their bank reconciliation.
By ensuring that these two totals are the same. Ensures that there were no mistakes on the previous bank reconciliation. And that entrepreneurs are starting from a correct spot.
Because if the totals do not match, a matter what an entrepreneur does for a bank reconciliation. They will not end up understanding fully how much money they have to use in their business.
The second step of doing a bank reconciliation says Edmonton bookkeeping. Is to look at their bank account statement, in order to cross off transactions that have already cleared their bank account already.
What an entrepreneur is left with, is a list of transactions that are pending or uncleared. An entrepreneur should always ask themselves when they see uncleared transactions why these are uncleared.
It could be that they are real transactions that are actually waiting to clear. Or, they could be mistakes or errors in entering information into the accounting software.
An entrepreneur must figure out which ones are mistakes. So that they can delete them out of their accounting software. And end up with a more accurate representation of how much money they have to use in their business.
For example, if an entrepreneur has ten thousand dollars of uncleared transactions that are mistakes. It will make it look like they have ten thousand dollars less to spend in their business. That could cause them to not make important purchases, pay bills off, or pay staff on time. When they could actually afford to do that.
The first thing that an entrepreneur should do is look at how long the pending transactions have been outstanding for. Because the longer they are outstanding, the higher probability there is, that they are mistakes.
Checks for example cannot be outstanding for more than six months. Because they then become stale dated. Which means the check is no longer valid, and must be reissued.
By deleting mistakes out of the accounting software. Can help entrepreneurs end up with accurate number of how much money they have to spend in their business. So that they can make their financial decisions, without fear of running out of money in their business.