Bank reconciliation is quite similar to a game. It may be complex; there are rules you need to know, things you need to look out for while starting, and challenges you need to prepare for midway. But once you’ve waded through it all, it’s safe to say that you’ll feel triumphant. That’s exactly how you’ll feel when you overcome bank reconciliation challenges! To get to this stage, it’s important to know what causes frequent mismatches in your records and solve them.
The primary reason to do a bank reconciliation is to root out any differences between your in-house records and bank statements, so you ensure that you have the right amount of money with which you can move your business forward. Differences between these two records can easily exist because of errors or additional charges caused by the business or the bank.
Some of these errors, such as manual entries and duplicate transactions that often get overlooked, can be avoided with smart technology and keen focus. However, it might be impossible to predict certain cash outflow and inflow, like bank charges or interests. For this reason, you need to identify what’s causing the mismatch in the first place so you’ll know whether it can be avoided or not, and then conduct a bank reconciliation to reconcile the differences.
Ultimately, when you know what’s causing mismatches in the first place and can tackle the common challenges that come along the way, you can be prepared for your reconciliation process, from the beginning until the end.
Common reasons for a mismatch between your ledger and bank statement
-
Transposition errors: This is a common error where you may have switched the position of a number. For instance, instead of entering INR 2,321, you may have entered INR 2,231.
-
Duplicate or missing entries: You may have entered the same entry twice or may not have accounted for a transaction at all. This could be due to an invoice getting lost, so it’s good to use software with invoice tracking features to avoid this problem.
-
Typing discrepancies: Commas and full stops may seem like something trivial, but they can affect your calculations, especially if you’re not rounding off the amount. For instance, you may have entered INR 5,305 instead of INR 530.5.
-
Reversal errors: You may have accidentally entered a transaction as a debit instead of credit.
-
Calculation or omission errors: This can occur if the total amount is calculated inaccurately, or if a certain transaction is omitted. In another instance, your bank statement may show something that’s not on your books. This could also be because of a keystroke error that may have prevented you from entering the right amount in your records.
-
Payment yet to clear: Outstanding checks can lead to a difference between your records and the bank statement. You may have issued a check to someone and recorded it in your ledger. However, the bank may take longer to clear the check or your payee may not have presented it yet. This would cause a discrepancy during reconciliation.
This could also happen with deposits in transit, where a deposit is yet to be processed by the bank. For instance, you may have deposited cash in the bank on May 10, and recorded it in your ledger on that very day. However, it may be credited on the bank statement on May 11. Alternatively, you may have entered a deposit in your ledger but your customer’s payment may have bounced. Keeping in contact with your customer and conducting regular checks can help with this.
-
No notification of direct deposits: Sometimes, a payment could be deposited to your account but you may not have been notified of it. So, your bank records would have an increased amount in comparison to your ledger.
-
Payment from alternate accounts: Your ledger may show something that’s not in your bank, and this could be because what you’ve received hasn’t been processed by the bank yet, or because you may have been paid in cash or from another account.
-
Bank interests, fees, and penalties: The bank may have charged you overdraft fees (for overdrawing from your account), bounced check or NSF (Non-Sufficient Funds) check fees, or even fees as part of their regular bank services. You may also receive interest from the bank, all of which may not have been recorded in your ledger. If your bank penalties are quite high, pick a bank with a more lenient fee schedule or with better overdraft protection. Note that the bank can also make errors, so it’s important to check whether their numbers are accurate, and follow up with them later regarding this.
-
Dishonored checks: If you’ve issued a check, and there isn’t a high enough balance in your account, the check will be debited in the bank statement and returned to you. This will lead to an imbalance.
Simple solutions to fix bank reconciliation challenges
For most issues, cross-checking the amount against your bank statement and paying more attention to details will help resolve them.
Here are a few guidelines to keep in mind so you can avoid hassles from the beginning:
-
Make sure you check your opening balance against your bank statement, so you’ll begin reconciling with the right amount.
-
Make sure that the original opening balance is reconciled and that any unnecessary transactions haven’t been included in previous reconciliations, causing a difference between the final amount and the ledger’s balance.
Once this is done, you can dive head first into your reconciliation. For any other challenges you may come across, here are some solutions that can help make your work easier.
Your check may be returned after it’s deposited
Sometimes, your bank may decline the deposit of a check because it’s drawing money from a foreign bank account. If this problem comes up, instead of recording an entry showing a failed deposit, reverse it by crediting the cash account, and increasing the debit in your accounts receivable.
Unpresented or uncleared checks
In the case of uncleared checks, if you have entered transactions in your ledger that haven’t been processed by the bank yet, mark them as ‘open’ and close them when the checks are presented, or book an entry and carry the un-reconciled transactions into the following month to complete it. That way, you’ll reconcile accounts during the current period, while also allowing your business to keep track of obligations to pay in the form of checks.
In case a check is not presented for more than 90 days, remind your payee to present the check for payment. Communicating with them will let you know if the check hasn’t reached them at all, and if so, mark it as void and issue a new check.
A similar solution should be taken in the case of delayed credit card payments, where you may have recorded the payment in your ledger but it may not be reflected in your bank statement yet. This entirely depends on when the credit card payment is finalized. You can also check if your software can auto-match credit card transactions that will be presented in the future.
A check marked as ‘void’ may get cleared by the bank
You may have issued a check to someone and, seeing that it’s not cleared for a long while, you may mark it as void and issue another one. However, right after this, your payee may try to encash the original check.
To avoid this, it’s best to void the check through the bank as your bank won’t encash the original check in such a case. If you haven’t informed the bank about the voided check, you may have to pay twice, leading to a duplicate payment. As a solution, you’d have to request a repayment from the payee and will have to add a credit to your cash account along with a debit explaining the payment.
A transaction may be displayed wrongly or may not appear
If you can’t find a transaction, check your records for a large sum. You may have a large amount shown in your bank statement, and the same amount may be split up into multiple transactions in your ledger (or vice versa). Reconciling frequently can help avoid such confusion. If you still can’t spot the transaction, you may have missed entering it, so simply add it to the list.
If a transaction that you haven’t made during this period shows up, check the date and see if it was previously reconciled. Ideally, your bank reconciliation list would show transactions that haven’t been reconciled so far, dated on or before the bank statement date. So, if a transaction shows up, it means that it either hasn’t been reconciled previously or that it’s a duplicate transaction (with one being reconciled, and the other not). In this case, remove the transaction that shouldn’t be reconciled and continue your reconciliation.
What else do you need to know?
For any regular changes you need to make, simply record the adjustments. If you have recorded something in your ledger, and it hasn’t reflected in the bank statement, the transaction will have to be recorded as an adjustment to the bank statement’s balance. Outstanding checks will have to be deducted from the bank balance, while deposits in transit have to be added to the bank balance.
On the other hand, if something’s been recorded in the bank statement but hasn’t been recorded in your ledger, the transaction has to be recorded as an adjustment to your ledger’s balance. Any charges you haven’t recorded will be deducted from your cash balance and deposits will be added to your cash balance.
With all these pointers in mind, note that if there’s still a minor amount to be adjusted, you can add it as a miscellaneous item for the time being, but look out for these in the future so they don’t pile up. Moreover, to prevent fraud (whether by an internal employee or an external third party), divide responsibilities well so that the same person recording transactions isn’t the same person reconciling accounts. You can also get additional bank protection to automatically freeze payments that haven’t been previously approved.
There are a host of benefits that make bank reconciliation simpler while using cloud accounting, and Zoho Books can ease it all for you, so your business can get accurate results and stay on the right track.