Do you know what a bank statement reconciliation is? If you are a Millennial, you probably don’t know what I am talking about. When most people think about what a bank reconciliation is – they think about connecting QuickBooks to their bank account. In fact, when I ask business owners whether they have reconciled QuickBooks to their bank account – they tell me that they have “reconciled” transactions in the bank feeds in the Banking Center. Actually, that is technically not a bank reconciliation. I’m about to share with you the insider’s secret to getting clean and accurate reports. Let’s go over what a bank reconciliation really is, why it’s so important, and why the 90’s called and they don’t want their bank reconciliation back.
[bctt tweet=”Why the 90’s called and they don’t want their bank reconciliation back ” username=”5MinBookkeeping”]
In the old days
In the old days (back when people used only paper checks and no one paid their bills online), you would use a checkbook with paper checks. After you wrote the check, you would hand-write the details of the check in the “check register” so that you could keep track of all banking transactions. You would also manually enter deposits and transfers in this check register.
Then, you would wait for the paper bank statement to arrive via mail and you would spend at least half an hour reconciling your bank statement to the check register. This was a very slow and tedious process – especially if you were out of balance. Being “out of balance” meant that you now had to start over and spend hours looking for errors.
Fast forward a decade or two and nobody seems to know what a bank statement reconciliation is – thanks to online bill payment, the cloud, and QuickBooks.
The tale of the missing deposit
Let me share my own personal story for why it’s so important to reconcile QuickBooks to your bank statement. A few years ago I started making depositing using my smartphone app. One day, I received 2 or 3 checks from my customers and entered a very sizeable deposit into my QuickBooks. At the end of the month, my bookkeeper prepared a bank reconciliation and we noticed that the deposit that I entered in QuickBooks did not show up on the bank statement. I logged into my online banking account and found no trace of the deposit ever being made. I could feel the panic coming over me – what happened to the checks I deposited? Well, I forgot to deposit them at the bank!
If I had not reconciled my QuickBooks to my bank statement I would not have found my error and it would have cost me a few thousand dollars. I hope my experience has convinced you why it’s so important to reconcile. Let’s go over the basics.
[bctt tweet=”Get the scoop on the insider’s secret to getting clean and accurate reports in @QuickBooks Online” username=”5MinBookkeeping”]
What is a bank reconciliation?
A bank reconciliation is the process of ensuring that all transactions on the bank (or credit card) statement are in agreement (“reconciled”) to the transactions in QuickBooks Online. It is the only way to ensure that all transactions are reflected in QBO. By doing a bank statement reconciliation, you can find:
- Duplicate transactions
- Missing transactions
- Transactions entered for the wrong amount
- Transactions entered in QuickBooks that never took place
Reconciling bank and credit card accounts in QuickBooks online
You may be wondering, aren’t you reconciling your banking transactions when you add and match transactions in QBO from the Banking Center? Actually, no. There is actually a formal process of reconciling transactions to a bank or credit card statement that is totally different.
To find the bank reconciliation, go to Gear Icon < Reconcile.
4 reasons why you should reconcile your bank and credit card accounts
[bctt tweet=”4 little-known reasons why you should reconcile your bank and credit card accounts” username=”5MinBookkeeping”]
#1 – To get meaningful and accurate reports
That’s because you can find all kinds of errors:
- Duplicate transactions
- Missing transactions
- Transactions entered for the wrong amount
- Transactions entered in QuickBooks that never took place
Ever wonder why your bank balance in QuickBooks doesn’t agree to your bank statement balance? That’s because you haven’t done a bank statement reconciliation. If your bank balance (or credit card balance) is wrong in QuickBooks that means that your reports are also wrong.
#2 – For accurate tax reporting
One of the most common mistakes people make is to duplicate income transactions in QuickBooks and to mis-categorize expense transactions. That means that you may be paying too much in income taxes because of duplicate income or missed deductions!
#3 – The IRS expects you to
The IRS expects you to reconcile your bank and credit card accounts. They will usually request to see your bank reconciliations if you are audited.
#4 – Your accounting professional expects you to (or they will charge you to reconcile your accounts)
The first thing any accounting professional (bookkeepers, CPAs, etc) does when working with your books is to see whether your bank and credit card accounts have been reconciled. That’s what we do at my company. It can get very expensive if you have been in business for several years and have never reconciled your accounts – your accounting professional may have to go back all those years to reconcile your accounts.
How often should you prepare the bank reconciliation?
You should reconcile your bank and credit card accounts once a month as soon as your statements are available. Are you a procrastinator? Here’s a tip – add an appointment with yourself every month to work on your reconciliations.
How long does it take to prepare the bank reconciliation?
It depends on the number of transactions, but generally, you should be able to do your reconciliation in up to 30 minutes.
What should you do before preparing the bank reconciliation?
You should make sure that you have entered, synched or matched all banking and credit card transactions into QuickBooks Online.
You also need to download a PDF copy of your bank and credit card statements. I find it easier to print them so that I can mark down transactions that I have matched up in QuickBooks.
How to prepare the bank reconciliation in QuickBooks Online
Here is a great video from my friends at Intuit on how to reconcile a bank statement in QuickBooks.
Start your journey toward meaningful and actionable reports
Now that you understand the important of reconciling your bank and credit card accounts, I encourage to get started and to make this an important part of your monthly 5 Minute Bookkeeping™ calendar. You’ll be amazed at what a difference it makes to reconcile your accounts. Now you know why the 90’s called and they don’t want their bank reconciliation back!