Any business owners may not understand how important a bank reconciliation is says Edmonton bookkeeping. And may think that they can make financial decisions. Just by looking at how much money they have in their bank account alone.
However, this would be a mistake to do. Because even though a bank statement will show how much money and entrepreneur has in that exact moment. The bank account also will not show entrepreneurs how much money they have to utilize. Once pending transactions have cleared.
Pending transactions can come in the form of checks that they have written, let try to fund transfers that they have scheduled, but have not yet cleared. Or even amounts from their debit or credit machine that have been booked, but take several days to clear.
Even if an entrepreneur has made a deposit into the bank via a machine. It may take a few days for these transactions to clear. Making it look like an entrepreneur has less money, because those transactions have not entered their bank account yet.
Therefore, it is very unreliable. For an entrepreneur to look at their bank account. In order to make financial decisions within their business.
In fact, Edmonton bookkeeping says if an entrepreneur looks at their bank account. And sees that they have ten thousand dollars to spend for example.
They might end up making a ten thousand dollar financial decision. Such as paying bills, running payroll or purchasing an asset.
However, if an entrepreneur also had ten thousand dollars of outstanding checks and electronic fund transfers. Making this decision will cause the checks that they have written, and the electronic fund transfers that are pending to bounce. Which could cause all sorts of problems for the business owner.
Therefore, Edmonton bookkeeping says entrepreneurs should get into the habit of doing a bank reconciliation on a regular basis.
Because this will show an entrepreneur how much money they have to utilize in their business. Once all of their pending transactions have cleared the bank account.
Not only that, but it will also help entrepreneurs fix any potential errors that have been made by entering information into their accounting software incorrectly. And by fixing those mistakes. Can end up with the more accurate representation of how much money they have to utilize in their business.
The first thing that an entrepreneur should do when doing a bank reconciliation. Is to look at the starting bank balance. To see if it matches the statement balance of previous bank reconciliation.
The reason why this is so important. Is to ensure that no future transactions have been booked, and marked clear. And by verifying these two totals are the same. Can ensure that they are starting their bank reconciliation with no errors in place.
Even if an entrepreneur does the bank reconciliation properly. If they do not verify they are starting the process without any mistakes. The bank reconciliation will not help them understand how much money they have to utilize in their business.
Learning how to do a bank reconciliation. Is one of the most important things that an entrepreneur can do. To help them understand how to spend money in their business.
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Business owners should understand that if they are not doing bank reconciliations on a regular basis says Edmonton bookkeeping. Not only are they not gaining a deeper understanding of how much money they have to utilize in their business. But there are likely accounting errors that are not being caught and fixed.
Business owners need to understand that being able to spend money responsibly in their business is extremely important. And verifying that they have the money in their business to make financial decisions. Can help ensure that they do not make critical errors.
In fact, 29% of all failed entrepreneurs in Canada. Site running out of money as the reason why their business failed. And if more entrepreneurs could learn how to do a bank reconciliation. In order to understand how much money they have to utilize in their business.
Fewer businesses would potentially fail because they run out of money. Because they will be able to make better business decisions.
Such as seeing that they do not have the money to make a financial decision. And instead, engage in some revenue-generating activities. Instead of spending money that they mistakenly thought they had in their business.
How doing a bank reconciliation can help entrepreneurs catch mistakes. Is because once they insured that the starting bank balance matches the statement balance of their bank reconciliation. The next step is to look at all of the transactions have cleared the bank account.
The most likely transactions that will have cleared are electronic transactions. Because those are immediate. They typically do not even get booked into an entrepreneurs accounting software. Until they have cleared. Because that is how an entrepreneur knows they have those transactions.
For example, a customer has sent to them and electronic fund transfer, and it has already appeared in their bank account says Edmonton bookkeeping. Therefore, looking at these transactions first. If any are outstanding. This is almost always a mistake.
Mistake that causes on electronic transaction to show as outstanding. Is if an entrepreneur has accidentally entered them into their accounting software twice. By looking for the additional transaction. Entrepreneurs can fix that error, and have a more accurate bank reconciliation.
The next thing that entrepreneurs should pay attention to. Is if they have any checks that are outstanding for longer than six months. The reason why says Edmonton bookkeeping. Is because if checks have been outstanding for longer than six months. They become what is called stale dated.
Stale dated checks can no longer be cash. Therefore, even if they are valid checks that have not been cashed yet. They are no longer able to be cash.
Should because an entrepreneur to avoid them out of their accounting system. And contact the person or company who should have received that check. In order to get them a new one.
By understanding how important bank reconciliations are. And how to ensure that they are accurate. Can help entrepreneurs understand how much money they actually have to work with in their business.