Bank Discrepancies (Reconciling vs. Plugging)

With an abundance of accounting software available to today’s entrepreneur, the advantage of an automated system may, at times, be too user-friendly. Credence is given to the application to keep the books as a user chooses to allow the program to correct any discrepancies as in this illustration of a routine bank reconciliation.

After completing a reconciliation, if the ending balance is off, an adjustment may be generated to fix, or plug, the numbers to balance. No research is done as to why the numbers don’t jive. It is assumed the bank’s balance is correct.

The importance of investigating any discrepancy, however big or small, cannot be underestimated. The following scenarios, of which there are many, may apply:

Cash Overage: A bank statement may show a deposit credited to your account but it’s mysteriously missing from transactions you’ve recorded. With a little digging, you may find the cash receipt(s) was never entered. For the customer(s) to receive proper credit, a manual correction is necessary rather than an automated adjustment. Another possibility may be the bank had posted the deposit to your account in error. The bank will need to be notified for this to be reversed.

Cash Shortage: The opposite of the previous example in that you made a deposit but it’s not showing up on the bank statement. Mistakes happen and human error occasionally slips in where a teller may press one wrong number landing your money in someone else’s account. A quick phone call to the bank will verify all was done correctly if you’ve kept your deposit receipt.

This could also mean the deposit never made it to the bank so it’s worth the effort to research the transaction rather than letting it go. Note, if the deposit was made just before the statement’s cutoff date, it’s likely to appear on following month’s statement.

Uncleared Checks: A few stragglers repeatedly show up in your “uncleared items” list after each reconciliation. Now you are the customer and uncleared checks equate to late payments. If you see a check that hasn’t cleared for an extended period, consider stopping payment and reissuing the check.

Another common error occurs when recording transactions from sales receipts. A credit card receipt may be mistaken for a debit card receipt. Instead of posting the transaction to a credit card register, it’s been entered into a check register. A quick retrieval of the receipt will confirm the transaction.

Credit Card Reconciliations: Many choose not to reconcile a credit card statement. Instead, the statement is entered as a bill. But reconciling a credit card statement is equally important.

A reconciliation will monitor any returns/refunds confirming that all transactions have been properly credited to your account. You’ll confirm that your last payment was received and last, but furthest from least, you’ll ensure that no unauthorized charges have taken place.

As menial as monthly reconciliations may seem, thanks to automated systems, the urgency of diligently and accurately processing them will remove any red flags from your cash flow. Having transactions cleared keeps the books clean and all questions answered.

Commingling Funds in a Small Business

When funds are scarce and liabilities are due, some business owners may be tempted to combine business and personal financial obligations. However dire the circumstances, using company funds to pay personal debt and expenses or vice versa is ill-advised.

Among the transgressions that could potentially wreak havoc on your company’s financial statements are the following transactions:

  • The deposit of business checks into a personal account.
  • The transfer of funds between business and personal accounts.
  • The disbursement of business checks to pay personal credit cards and personal expenses.
  • The use of a company credit card for personal purchases.

Of the many nightmares misuse of cash creates is the confusion to be had when filing tax returns. Explaining to the IRS the differentiation between business and personal transactions when merging them is a headache you don’t need.

Commingling funds discredits the financial profile of your company. The statement of cash flows is skewed. The balance sheet is inaccurate and discrepancies surface on the profit and loss statement. The result being inaccurate tax liabilities and a bogus bottom line.

Preventing the aforementioned scenarios is simple.

  • Have a buffer. A minimum savings of six months of expenses will suffice and continue adding to it. Keep separate savings accounts for your personal and business expenses.
  • Create a budget and stick to it. Both a business and a personal budget will keep you on track and prevent overspending.
  • Limit credit card debt and pay off balances within a short period of time.
  • Deposit business checks into your business account and pay yourself. This allows disbursement of funds from the appropriate sources of income.

Remember that commingling complicates your bookkeeping and jeopardizes the progress of your business. Business income is used to support business operations which includes your paycheck.

Abiding by this simple rule of keeping distance between your business and personal financial obligations will help ensure the stability and success of your small business.