Bank reconciliation is an important process that helps small businesses and side hustlers make sure their financial records are accurate by checking that everything on the business bank statements is reflected in the accounts and picking up any errors that have happened.
In this blog post, we’ll explain the four essential steps to successfully completing bank reconciliations for small businesses in the UK.
Step 1: Gather Relevant Documents and Information:
Before you start reconciling your bank accounts, collect all the documents and information you’ll need. These include your bank statements, receipts, payment records, sales invoices, and other financial records. You can have physical copies, digital files, or use your banking software.
Step 2: Compare Bank Statements with Cash Receipts and Payments:
Once you have your bank statements and financial records, it’s time to compare them. Start by comparing the cash receipts and payments in your accounting software with the transactions listed in your bank statements. This helps you find any differences or missing transactions.
Make sure you check the dates, amounts, and descriptions of each transaction carefully. Sometimes mistakes or missing information can happen, so pay attention to detail. You can also attach photos of receipts or add invoices to each transaction if they are missing.
Step 3: Fix any differences
Discrepancies may arise due to timing differences, errors, transfers between payment processors (like Etsy or Stripe) or outstanding transactions. It’s important to resolve these differences and bring your bank account and records into alignment. Common differences to look out for:
a) Outstanding cheques or deposits: Check if any cheques or deposits are still outstanding from the previous period. Ensure these items are accounted for in the current reconciliation.
b) Bank fees and charges: Be aware of any bank fees or charges that appear on your bank statement but haven’t been recorded in your accounting software.
c) Errors or misclassified transactions: Mistakes happen, so double-check for any errors or misclassified transactions that might have occurred during data entry. This is especially important when using payment gateways like Paypal and Etsy. Make sure you haven’t entered things twice and account for any fees.
d) Bank errors: Although rare, banks can make mistakes too. If you think there’s a mistake from the bank’s side, contact them to get it fixed.
Step 4: Make Adjustments and Updates:
Once you’ve identified the differences, it’s time to make the necessary adjustments and updates to your accounting records. This step ensures that your financial records accurately reflect the reconciled bank statement. Correct any mistakes, update outstanding transactions, and fix any misclassified items or errors.
Remember to keep a record of the adjustments you make during this step. It’ll help you keep track of the changes and provide clarity during audits or HMRC inspections.
Bank reconciliation is important for small businesses in the UK. By following these four steps, you can make sure your financial records are accurate, catch and correct any errors, and meet HMRC requirements. Remember, regular reconciliation not only keeps your financial information in order but also contributes to your business’s overall financial health and success. If you need help with your bank reconciliations, or you have found something you are not sure how to fix, you can book a call with me here.