One important tool that entrepreneurs have to use says Edmonton bookkeeping. Our the bank reconciliations. This is what helps an entrepreneur understand exactly how much money they have two utilize in their business.
If entrepreneurs are looking only at their bank statement. In order to make financial decisions in their business. Such as if they have enough money to run payroll, or purchase assets for example. They may not understand exactly how much money they have to use. Which can cause entrepreneurs to overspend.
In fact, the second most common reason why entrepreneurs in Canada fail. Is because they ran out of money. So by being able to make more informed financial decisions. Many entrepreneurs can help themselves overcome these odds.
However, many business owners especially when they are new. Do not know how to figure out how much money they have to use in their business. Which is why they end up looking at their bank statement.
This is where their Edmonton bookkeeping company should teach them about bank reconciliations. Because this will help entrepreneurs understand how much money they have to utilize in their business. By taking into account all of the uncleared transactions that they have.
In order to do a bank reconciliation. Business owners should start with their statement balance from their accounting software. And the starting balance of their bank statement.
Looking at both of these amounts, a business owner should find that they are the same amount. By verifying this. Business owners will find that they will get an accurate total after completing the bank reconciliation.
If however, a business owner has discovered that there statement balance from their accounting software, and the starting balance of their bank statement does not match. This is typically because a future item has been booked, and then marked clear.
By fixing the mistake of the future item being marked clear. An entrepreneur should find that the statement balance and be bank statement balance end up being the same.
Once an entrepreneur has verified that the starting point for the bank reconciliation is accurate. The next step, is looking at all of the uncleared items in their accounting software, and checking it against their bank statement.
A business owner should understand what an uncleared statement is. And that is a transaction that has been booked, it has not cleared the bank yet says Edmonton bookkeeping.
One of the most common examples of an uncleared transaction. Is a check that an entrepreneur has written. But has not been cashed by the person it has been sent to.
It could be that the check is still in the mail, or that the person who received the check has not made a deposit yet. But even once a person who receives a check deposits it into their bank account. It can take up to a few days to clear.
By looking at all of the uncleared transactions, business owners will be able to determine how much money they have to use in their business. Which will help them understand if they have the money to make financial decisions. Such as if they can run payroll, pay bills, or make purchases.
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Business owners should understand how powerful a bank reconciliation is says Edmonton bookkeeping. In fact, business owners should not be making financial decisions in their business without doing this first.
The reason why, is because looking at the bank statement alone. Is not going to show an entrepreneur how much money they have two utilize. Because while a bank balance will show exactly how much money they have in their accountant at that moment.
If an entrepreneur has uncleared transactions. It may look like they have a certain amount of money, when some of that money has already been spoken for.
For example, an entrepreneur might see in their bank account that they have ten thousand dollars. But if they have written checks equaling five thousand dollars. They only have five thousand dollars to use.
If by looking at their bank balance. Entrepreneurs see the ten thousand dollars, and then suspended. They will cause those future transactions that have been scheduled but have not cleared yet. We will bounce, causing all sorts problems for the business owner.
This is why the bank reconciliation is so important. Because it will allow an entrepreneur to check all of the transactions that have been made. Against their bank balance, to verify what transactions have been cleared. And which ones are pending.
This is also how an entrepreneur can catch mistakes that may have been made in entering information into their accounting software. By looking at how long these transactions have been outstanding for.
A great example of this, is if an entrepreneur has electronic transactions that are outstanding for any period of time. The reason why says Edmonton bookkeeping. Is because just by the virtue of them being electronic transactions. Means that they should not be outstanding at all.
Typically, when people are putting electronic transactions into their accounting software. It is because they have already cleared. These transactions are immediate, and do not show up unless they have already cleared.
Therefore, if business owners can see that there are electronic transactions that are uncleared. This is typically an error that needs to be fixed.
The typical reason why electronic transactions are showing as uncleared. Is because they likely have been entered more than once by mistake. And by deleting the additional transactions. Can make the bank reconciliation more accurate.
However, other transactions are not immediate. Such as checks. And while checks should not be outstanding for longer than a week or two ideally. It depends person received the check. And when they deposit it.
However, Edmonton bookkeeping says entrepreneurs should be very aware if there checks have been outstanding for longer than six months.
Because after six months, the checks become void, and cannot be cashed. So if they have a check that has been outstanding for this long. They should delete this out of their accounting software. And rewrite the check.
By understanding why they should do a bank reconciliation. And how a bank reconciliation should be done. Entrepreneurs can understand more clearly, how much money they have to work with.