When business owners start their business for the first time says Edmonton bookkeeping. They often makes them mistakes early on in their business. And one of those mistakes would be looking at their bank statement in order to make financial decisions.
The reason why this is a mistake. Is because the bank statements will not show pending transactions. And the more pending transactions an entrepreneur has, the more the bank balance is going to change when all of those transactions clear the account.
Therefore, if entrepreneurs are looking at their bank statement. They may think they have a certain amount of money to use in their business. But they bank statement does not take into consideration any of the transactions that are pending.
What a pending transaction is says Edmonton bookkeeping. Our payments that an entrepreneur has made, and entered into their accounting software. But have not cleared their bank account yet.
The most important thing for an entrepreneur to keep in mind about a pending transaction. Is that they can becoming both into their bank account as well as out of their bank account as well.
This can make it very confusing for an entrepreneur to try to keep in mind when they are looking at their bank statement. Which is why it is important for business owners to do a bank reconciliation.
Edmonton bookkeeping says a bank reconciliation is showing an entrepreneur how much money will be left. Once all of the transactions that they have entered into their accounting software have come out.
Or those transactions have gone into their bank account. How an entrepreneur can start doing a bank reconciliation. Is to take their most recent bank statement.
And match the starting bank balance to the ending bank balance of their last bank reconciliation. The reason why this is so important to do. Is because verifying that these two amounts match.
Means that they can continue to compare the transactions from their accounting software to their bank account. And end up with an accurate amount of how much money and entrepreneurs left with.
The next thing that they will do when they are doing a bank reconciliation. Is look at all of the various transactions that have actually cleared.
They can look at their accounting software, to see what transactions they have accounted for. And match them against the bank statement, to see if those transactions have come into or out of their bank account yet.
A great example of this. Is an entrepreneur that has written five checks in their business. And by looking at their bank statement, they can see that three of those checks have cleared.
And by taking into consideration the amount of money that are on the two checks that have not cleared, the bank reconciliation will show how much money they have left over once those checks have been cashed.
They will do this for all pending transactions including electronic fund transfers, checks, a debit and credit transactions, and electronic transactions as well.
When they complete the bank reconciliation. This will show an entrepreneur exactly how much money is in their business that they can spend. Which will allow them to make financial decisions a lot more easily and with more peace of mind.
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It is very important for business owners to learn how to make financial decisions accurately says Edmonton bookkeeping. Many entrepreneurs struggle with this. And in fact, many entrepreneurs end up failing in business because of this as well.
According to industry Canada, 15% of all businesses fail within the first year of opening their doors. 30% of all Canadian entrepreneurs fail by their second year in business. And half of all entrepreneurs that open businesses will fail within five years.
When looking at the reasons why, industry Canada found out that the second most common reason why entrepreneurs failed. Is because they ran out of money in their business.
Therefore, when entrepreneurs learn how to make financial decisions. Based on bank reconciliations into that of bank statements. Can help them spend money more responsibly. So that they do not accidentally overspend.
What a bank balance will not show entrepreneurs. Is how much money they have after pending transactions have cleared. And what a pending transaction is says Edmonton bookkeeping.
Is a transaction that they know will happen. And have entered into their accounting software. However, that transaction has not yet cleared their bank account.
The reason an entrepreneur needs to be very aware of these pending transactions says Edmonton bookkeeping. Is because often, and they show up on bank reconciliations they are actually mistakes that need to be fixed.
The reason why they showbiz pending transactions. Is because they will never cleared the bank account. Because the transaction was either entered twice, entered incorrectly. And therefore, they will set their on their bank reconciliation, indefinitely.
A common mistake is if an entrepreneur has accidentally entered a payment twice into their accounting software. The first transaction will cleared the bank account and disappear off the report. While the second one will sit there, and since there is not more money coming into the business. It will never be cleared.
Therefore, business owners need to ensure that any time they see an uncleared transaction on their bank reconciliation. They need to ask himself if it is legitimate, or if it is an error that needs to be fixed.
One of the clues that business owners can use in order to make this determination. Is how long it has been uncleared for.
Edmonton bookkeeping says all the various transactions that entrepreneurs will have pending will take a different amount of time to clear. Based on the different types.
For example, checks can take several weeks to clear. Especially if they have been mailed out. And will depend on when the person who receives the check enters it into their own bank account.
Whereas electronic transactions should never be pending. Because these are immediate. And as soon entrepreneur receives the notification, these transactions have already entered their bank account.
Therefore, business owners can look at the amount of time that these transactions have been pending. In order to determine if they are accurate transactions. Or if they are mistakes that need to be fixed.