Tag: bank statements

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

Does This Make My Files Look Fat (Part 2)?

Photo by xeeliz at Flickr.com

What Documentation Do I Need To Support My Tax Return?

 

I recently got an e—mail from my friend Steve who was concerned that he was keeping his records for too long.  He was looking to purge some of his files and he also wanted to know if he was overdoing it on his documentation.  Steve owns a small business.   This is part 2 of a series—http://robergtaxsolutions.com/2013/11/does-this-make-my-files-look-fat/.

 

In my last post I talked about the IRS rules for record keeping.  The problem I find with the IRS post is they tell you to keep records for your tax returns, but they don’t tell you what records to keep.  I’m going to go over those here.  Part of my job as an Enrolled Agent is to assist people who are getting audited.  So, based upon my audit experience I think you should keep the records that the IRS will ask for in the event of an audit.

 

Bank Statements—if you own a small business, you should have a separate bank account for the business.  In an audit, the IRS will always ask for copies of the bank statements.

 

Deposit tickets—Granted, your deposits should all be reflected on your bank statement, but they always ask to see those so hang onto them as well.

 

Receipts for expenses— always good to have.

 

Mileage logs—if you claim mileage you should have a log.  Hold onto these—they are like gold.

 

Your QuickBooks or other accounting software records.

 

Now for space purposes—you can have all of these things scanned and saved on disc or on the cloud.  I like to keep the paper around for at least three years, but after that, as long as you can access the scanned documents you should be good.

 

Here’s the funny thing—the better you are at keeping records, the more stuff you can throw away.  Counterintuitive, right?  Let me explain, let’s say you use QuickBooks, and you purchase a few cases of paper and other stuff from your local office supply company.  They deliver the paper and goods and send you a bill.  You write them a check and log into QuickBooks something like Check #1241 to Office Supply Solutions for $162.47 paid on October 31, 2013 from Bank of America checking account and expensed as office supplies.  It’s all right there in your QuickBooks transaction.

 

Now, for the three years, I would still hang on to the Office Supply Solutions receipt, I’d keep my bank statement, and my checking account register.  But after five years, I’d let those receipts find their way to the shredder.  (Yes, the IRS says three, but I’m paranoid.)

 

If your records are good, you don’t need to hang on to stuff for as long because you documented everything and it will tie to your bank statement.  Three years from now when you’re getting audited, you’ll have no clue what check number 1241 was for—you don’t have to, it’s in your QuickBooks.

 

But if your records are bad—that’s when you really need them.  Let me explain—

 

Let’s say I don’t use accounting software, I don’t maintain a separate bank account for my business, and I don’t keep a ledger of my expenses.  One day the IRS decides that I’ve over claimed my expenses (meaning that my income is actually higher.)  Remember my last post?  If the IRS believes that you underreported your income by 25% or more, the statute of limitations on an audit is 6 years instead of three.  (If they think it’s fraud, it’s open season on your forever.)

 

Well, the person with good records still has his QuickBooks account and matching bank statements.  Everything ties.  Easy audit—in, out and outta there.

 

The person with the bad records is going to have to dig and find that office supply receipt, find cancelled checks (who still get cancelled checks anyway?) or somehow prove the expense.  Can you pick up a random bank statement from three years ago and look at a check number without copies of the cancelled checks and tell what that check was written for?  Even if you can, the IRS auditor isn’t going to believe you without a receipt to back it up.

 

So keep good records now, so you can thin out your files later.