Bank reconciliations are an extremely important tool for entrepreneurs to use says Edmonton bookkeeping. And can help business owners learn how to spend money responsibly. And help them understand when they need to bring more money into their business.
What a bank reconciliation is. Is a statement showing how much money an entrepreneur has their business. Once pending transactions have cleared their bank account.
Every time an entrepreneur enters information into their accounting software. Such as invoices that they are sending out or receiving. This will impact their finances.
A business owner also will enter into their accounting software. Any payments they have made. And when those payments are waiting to clear their bank account. Edmonton bookkeeping says they are considered pending transactions.
These payments could be made with their debit card, credit card, checks that they have written, or even electronic fund transfers that they have scheduled.
Entrepreneurs are will enter these payments into their accounting software, but they will not have come out of their bank account yet.
If an entrepreneur looks at their bank account in order to figure out how much money they have utilize in their business. They might see exactly how much money is in their bank account at that moment.
But what the bank statement will not show them says Edmonton bookkeeping. His how much money is left over, once all of those payments that they have created have cleared their bank account.
This is why the bank reconciliation is so important. Because it will show entrepreneurs how much money is left in their account, when all of the amounts that they have paid have cleared.
In fact, many entrepreneurs do not do a bank reconciliation when they are new in business. Typically counting on their bank balance to make financial decisions. Such as if they have enough money to run payroll, pay bills, or even pay themselves.
However, this can end up with entrepreneurs spending more money than they have. For example, they might see that they have twenty thousand dollars in their bank account. And they might think that there fifteen thousand dollars checks have already cleared.
Making them assume that they have twenty thousand dollars that they can spend. However that would be an incorrect assumption.
However, the bank reconciliation will be the tool that entrepreneurs can use. To see that while they might have twenty thousand dollars in their bank account. The fifteen thousand dollars of checks that they have written have not cleared. And they actually only have five thousand dollars to spend instead.
Not only can they use this information to understand when they can spend money and when they should avoid it. They can also be very proactive with this information such as if they need to make money.
Or if they need to engage in more revenue generating activities. Such as increasing their online marketing spending. Or if they need to do more sales calls. Or even if they should engage in collection calls, to bring more of the money that they are owed into their business more quickly.
By understanding how a bank reconciliation should be used. Can help entrepreneurs learn how to create one in their business. So that they are better prepared to spend money more responsibly in their business.
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It is very important that business owners learn how to spend money in their business says Edmonton bookkeeping. So that they can avoid running out of money in their business.
While not every business owner who runs out of money in step going out of business. However, industry Canada has found that 29% of businesses who fail. Say that the reason why their business failed was because they ran out of money.
Learning how to spend money responsibly in their business. Can help entrepreneurs avoid this obstacle. That causes so many entrepreneurs to fail in Canada every year.
The purpose of the bank reconciliation says Edmonton bookkeeping. Is to understand all of the uncleared transactions that an entrepreneur has in their business.
Every time an entrepreneur creates a payment, if it has not cleared their bank account yet. This is called an uncleared transaction. While looking at their bank statement will show how much money they have in their business at that moment in time.
Unfortunately, their bank statement also will not show them how much they have in pending transactions. Which will ultimately show an entrepreneur how much money they have to utilize.
Not only that, but when an entrepreneurs looking at uncleared transactions. They will also be able to determine if the uncleared transactions are mistakes that need to be fixed.
Because a lot of the time uncleared transactions happen if an entrepreneur enters payments incorrectly, or accidentally enter them twice.
How an entrepreneur can determine if the pending transactions are legitimate. Or if the uncleared transactions are mistakes says Edmonton bookkeeping. Is to start by looking at how long these transactions have been pending for.
Different transactions will have different amounts of time that they are pending. From checks, that can be pending for several weeks or even longer. To electronic transactions that should never be pending for any amount of time. Because electronic transactions are immediate.
The reason why checks take the longest to process. Is because they are often but in the mail, which can take up to a week. And then once the person receives the check, they actually have to deposited into their bank account.
While best practices say that people should deposit checks on the same day that they receive them. This is not always the case. And then once it is deposited, it will take another several days to actually clear.
However, entrepreneurs need to keep in mind that checks cannot be outstanding for more than six months. Because then they become what is called stale dated. Which means they are no longer valid and cannot be cashed.
Therefore, Edmonton bookkeeping says if entrepreneurs see checks that have been outstanding for longer than six months. These are either mistakes. Or they are actual transactions. That need to be voided and rewritten because they will not be able to be completed.
By understanding bank reconciliations and pending transactions. Entrepreneurs can not only fix accounting mistakes quickly. But ultimately end up understanding how much money they have utilize in their business.