Category: Bookkeeping

Posted on by Michael Siebert

Why Bank Reconciliations are Absolutely Necessary for Your Small Business

Great Depression Bank Runs

 

Why doesn’t my QuickBooks balance match my bank balance?

Whenever you issue checks to vendors, there is no saying how long it will take the vendor to deposit the check into their bank account.  This represents a “timing difference”.  For instance, if you issue a check on March 29th, and the vendor doesn’t deposit the check until June 29th (For whatever reason) there is a significant timing difference between when this check was entered into your accounting software and when it effectively hits the bank statement.  Timing differences are the main reason why your QuickBooks balance doesn’t match your actual bank balance and they happen quite frequently.

 

Your QuickBooks balance, assuming you are on top of your data entry duties, is a more accurate picture of your bank balance alone as it takes into account the floating checks and already subtracts that cash from the bank account balance. It also accounts for deposits in transit (deposits that have not yet hit the bank statement).  Timing differences won’t exist however, if your checks and deposits clear within the final days of the month.

 

The goal of a reconciliation is not to find the discrepancy between your accounting software balance and your bank balance because of timing differences.  These are normal discrepancies.  The goal is see if this discrepancy is a result of error from the accounting system or error from the bank (Yes-sometimes the banks screw up too!)

 

Think of it as a way to verify that your cash from your company books is consistent with your bank statement records.  Since the ability to acquire and obtain cash is the beating heart to any business, small or large, the cash account, or multiple cash accounts deserve specific attention.  The phrase “Cash is King” has been merited all these years with great reason.

 

The Bank Statement Formula

Consistent with any bank statement is the formula used to determine how we get to the ending balance from the beginning balance.  The formula is stated below:

= Beginning Balance
+ Deposits and other Credits
–  Withdrawals and other Debits
–  Checks
–  Service charges
= Ending Balance

This is the formula that is being used to determine the reconciliation difference.

 

Reasons to do bank reconciliations

  1. Internal control – tracking the inflows and outflows of cash is crucial in determining if someone with check writing authority is abusing their power.
  2. Determining if there are missing transactions—the bank reconciliation helps determine that all of your cash transactions are in your accounting system.
  3. To see if companies are taking advantage of you—Sometimes humans make mistakes and might run your card twice on accident but sometimes it’s no accident.
  4. Discovering bank errors or accounting software data entry errors
  5. To give a true accurate depiction of the money in your bank account.  For example, take a property management company.  They may manage properties in Florida, California, Missouri, and Illinois.  With hundreds of checks being written and mailed, it is absolutely crucial to know what checks are still outstanding because these vendors can deposit the check at any time.  Some vendors take months to deposit checks (I’ve seen it before and I’ll see it again.)

So there you have it.  Now that you know why you should do a bank reconciliation, read my next post about how to do a bank reconciliation.

Posted on by Jan Roberg

The Petty Cash Account

Bank Bag Lock

Photo by Laura Gilmore at Flickr.com - Some companies use a bank bag with a lock to keep their petty cash in.

 

Petty Cash Expenses Template – This is a free download to keep track of your petty cash.  Please feel free to share it or alter it to suit your needs.

 

A while back I did a post about taking cash for your business out of the ATM machine.  I said you should never do it.  I’ve gotten a lot of push back from readers who need to use cash for their businesses on a regular basis.  Here’s an example from Tracy who writes:

 

“What options do I have when I need to pay for cash transactions like Mass Transit & Taxi’s (I don’t drive) which total over 250/mo.(expendable as fringe benefits per IRS 15-B), or even office & software supplies?

Credit Cards don’t issue without corporate credit (which will take a year +), so can only use Prepaid Cash cards – which have to be paid by cash.

There are very few places where I can use my corporation check.  So using checks as a paper record is out.

What do I do?”


Tracy has a good point.  What do you do when you’ve got to use cash?  You need to set up a petty cash account.  In Tracy’s case, I’d say her petty cash account needs to be $250—but it’s really up to her as to how much cash she needs to keep around for her business.  I have one client who regularly keeps $1000 cash available; it all depends upon your type of business and what works for best for you.

 

With a petty cash account, you have your base amount-we’ll use $250 for Tracy’s example.  The first step is to write a check (or take out the cash) to Petty Cash.  Establish a place to keep the petty cash money separate from your regular spending money.  As Tracy spends down the money—on Taxis and subway fares and other business expenses, she keeps receipts for everything.  Or at least a log of things like subway fares.  Technically, what she should do is make a report like what I’m showing below:

 

7/24       Subway                  1.20

7/25       Taxi                       18.00

7/25       Office supplies   24.76

7/25       luncheo n             12.16

7/26       taxi                       23.45

7/27       office supplies    88.22

7/29       Subway                  4.20

Total                                   171.99

 

At the end of the week, or month, or whenever it makes sense to replenish the cash supply, Tracy would write another check for $171.99 to bring the petty cash account back up to $250.

 

That’s the technically correct way to maintaining your petty cash account.  Basically you have a base amount and there are receipts for whatever cash is no longer in the bag.

 

But what about real life?  I say that because 80% of the people who use cash for their businesses aren’t going to be so disciplined.  But I don’t want you getting into audit trouble for your cash withdrawals from the ATM.

 

Let’s use John as an example.  If you look at John’s business bank statements for the past year, he’s got about 100 ATM transactions over the course of the year, usually taking out $40 at a time.  If John were to be audited by the IRS, the IRS would count that $4000 business profit which is taxable to John, even though he spent that entire amount on business.

 

I can tell John to do the Petty Cash account the way I explained above, but being realistic it’s never going to happen.  He’s going to keep going to the ATM and grabbing cash whenever he needs it.  So how does John cover his behind?  Keep receipts!  If you don’t get receipts, write everything down.

 

For example:  John has a property management company that takes care of several single family homes and some small apartment buildings around town.  One of the homes is currently vacant but he needs to keep it looking good so it can rent.  Although a tenant would be responsible for mowing his own lawn, John hires a neighbor kid to mow the grass a few times while to house is still vacant.  It costs him $40 a pop.  He’s paying a kid, not a business.  No 1099MISCs, (he won’t get close to paying him $600).  The kid might not even have a checking account so he can’t accept a check or credit card.  The kid is not issuing receipts-he’s a kid.

 

John goes to the ATM, gets $40 to pay the kid and he writes down on the ATM slip a few notes about the expense.  (Paid Walter $40 to mow 541 Mockingbird St. house.)  John keeps that ATM slip with his business records to act as his business receipt.  As long as John spends less than $75 on something—that will be acceptable.  If John spends more than $75, he needs a receipt from the vendor.  (Even if the vendor is a 16 year old kid.)

 

I still recommend not using the ATM for your business expenses whenever possible, but if you must, you can protect yourself from having the IRS count your cash transactions as income to yourself—and paying more taxes by keeping good records of the transactions.