There are bank reconciliations and then there are bank reconciliations. Computer accounting software programs can do them automatically now, but what do you get? You get a confirmation that you are “in balance” with the bank. Is that all you need? Not for me! I still do them the old fashioned way, e.g., by hand. You might think I’m just an old-fashioned guy who can’t break an old habit. Perhaps. But, let me tell you some very good reasons why I still like the manual approach.
First, let me suggest that you read my article titled, “The Bank Reconciliation: Your Most Valuable Navigational Tool“ in the articles section of this blog. Next, download a blank bank reconciliation form from this link: http://www.reallifeaccounting.com/forms.asp
Now for the good reasons!
Good reason number one: A manually prepared bank reconciliation forces you to familiarize yourself with the deposits, checks, bank charges, outstanding checks, outstanding deposits, mistakes, bank errors, and other strange phenomenon that occur occasionally during a month’s bookkeeping transactions. This information that gets assimilated in your brain is invaluable when problem-solving later on.
Good reason number two: All the information regarding increases and decreases to your bank account are right there on one page. You will require this information when writing journal entries to make sure you have captured “all” the transactions that have occurred during the month, related to cash.
Good reason number three: The completed bank reconciliation form is a great reference for you when trying to figure out why your Cash account is out of balance. Theoretically, your Cash account should be in-balance. However, for some strange reason, this often is not the case.
Good reason number four: Keeping your eye out for outstanding checks that never clear the bank (stale-dated checks). Sometimes a check is voided but doesn’t get removed from the register. Sometimes a check gets written but doesn’t get put on the register but then clears the bank. These items require special adjusting journal entries. You can’t write them if you don’t even know about them.
Once you have a reconciled balance, you can run a preliminary financial statement and check to see if the general ledger Cash account balance is the same as that found on the bank reconciliation. If so, you have a green light to continue on. If not, the first step is to run a detail of the general ledger report for the Cash account. Use that information to compare what is on the bank reconciliation form. It should be the same, and, if not, the discrepancy will stand out like a sore thumb.
So I ask you, “How could I possibly do all this with a report that merely tells me that I am “in-balance”? I contend that it is well worth the extra time to prepare a manual bank reconciliation. I believe you are navigating in the dark without one.
What do you think? Feel free to ask any process questions about the mechanics of bank reconciliations.
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