The reasons why bank reconciliations are necessary says Edmonton bookkeeping. Is because it will show an entrepreneur how much money they have to utilize in their business.
Many entrepreneurs start their business with the assumption that the bank balance that they see is how much money they can spend. But this would lead to spending more money than they have.
The reason why, is because the bank statement will not show how much money they have to use. Once pending transactions have cleared their bank account.
What a pending transaction is says Edmonton bookkeeping. Is a payment that an entrepreneur has made, it has not cleared their bank account yet.
This can be a debit or credit card payment. Which will take a few days to show up on their bank account. Or a little bit more if they made the payment on a weekend.
A pending transaction could also be a check that an entrepreneur has written. That has not yet cleared their bank account yet.
Or a pending transaction could be an electronic fund transfer that an entrepreneur has scheduled. But it has not yet come out of their bank account.
The busier an entrepreneur gets, and the more bills they have. The more pending transactions they will end up having every month.
This is why a bank account balance is not going to be an accurate representation of how much money and entrepreneur has to use.
For example, an entrepreneur might look at their bank balance. And see that there is ten thousand dollars in their account. However, they may have assumed that all of their checks have cleared. But they still have a check that is worth eight thousand dollars waiting to clear their bank account.
If they spend money with the assumption that the large check has already cleared. Not only will they overspend money. They will also cause payments to bounce, creating even more problems for the business owner.
This is where the bank reconciliation comes in handy says Edmonton bookkeeping. Because it will help an entrepreneur understand how much money they have left in their business, when all pending transactions have cleared their bank account.
In addition to that, a bank reconciliation can help an entrepreneur fix mistakes. That may have been made in their accounting software. By paying attention to what transactions are still pending.
For example, an entrepreneur might have made a mistake when entering their transactions into their accounting software. Such as entering a payment twice.
And when the correct transaction clears the bank account, the second, incorrect one will remain. Showing up on every single bank reconciliation until the mistake is fixed.
Therefore, by paying attention to any of the transactions that are not cleared. Business owners can fix the mistakes that could be in their accounting software. As well as understanding how much money they have to utilize in their business.
When they go to make financial decisions such as running payroll, purchasing assets or paying bills. By knowing exactly how much money they have to use. Can help ensure that they spend the correct amount, and not overspend money they do not have.
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It is very important that business owners learn how to do a bank reconciliation says Edmonton bookkeeping. Especially when they are making financial decisions in their business.
In fact, industry Canada says that while 50% of all entrepreneurs fail in business in Canada within five years. The second most common reason why entrepreneurs are failing. Is because they are running out of money in their business.
If business owners were able to learn how to do bank reconciliations earlier on in their business ownership. They would be able to use that information to spend money more responsibly.
But even more than that, Edmonton bookkeeping says that business owners will be able to take those bank reconciliation reports. And if they do not have enough money to make a financial decision in their business.
Such as if they need to run payroll, or pay bills. But they do not have the money in their business to do that. Not only will they be able to see that looking at their bank reconciliation.
But they will be able to be proactive in generating more income. Either by increasing their marketing, going out on more sales calls. Or minimizing expenses, or doing collection calls.
Not nor can be proactive in ensuring that they are responsible for generating more money. So that they can make those decisions like running payroll, and paying bills.
Therefore, learning how to do a bank reconciliation not only can help entrepreneurs avoid spending more money than they have says Edmonton bookkeeping. But can become an important tool in helping entrepreneurs proactively grow their business as well.
How an entrepreneur would start doing a bank reconciliation. Is simply by taking their last bank statement. And comparing that starting bank balance with the final balance of their last bank reconciliation.
They should verify that those two amounts are the same. To ensure that their books are balanced. And that by comparing all of their pending transactions from their accounting software. To their bank statement. Entrepreneurs can verify that they will end up with an accurate final total.
The next thing that entrepreneurs need to do, is look at all of the transactions that have already cleared their bank account that has been accounted for. What they will have left, is a list of transactions that have not cleared the bank account.
Edmonton bookkeeping says entrepreneurs need to ask themselves a question when they see that list of uncleared transactions. Is our these legitimate transactions? Or are they errors that needs to be fixed?
What can help them determine the answer that question is how long those transactions have been pending. If it is a credit card or debit transaction that has been pending for a month or more.
This is typically an indication of an error. Because these should take anywhere between one day to one week to clear.
Checks on the other hand will take a lot longer. But they will never be outstanding for longer than six months. Because they become stale dated.
Therefore, by looking at the transactions that have not cleared yet. Can help an entrepreneur determine if they are waiting to clear still because they are legitimate. Or if they are mistakes.
At the end of this exercise, they will be left with a list of uncleared transactions that are accurate. So that they can end up with how much money they will have in their bank account once all of these transactions have cleared.