The advantage of reconciling everything

Reconciling assets

Reconciling accounts is every bit as fun as it sounds - right up there with dental visits. But, just like trips to the dentist, they are a good idea, and are beneficial for the overall health of the individual, which in this case is your business.

What commonly comes to mind when hearing 'reconcile' is comparing the monthly bank statement to your checking account, and that's a great place to start. Knowing that you've recorded all banking transactions assures that cash income and expenditures are accounted for.

What about loan balances, or credit card charges? Have you reviewed those? Accounts used to record payments and charges can, and should, also be reconciled. Any account for which you receive a periodic statement can - and I reiterate - should be reconciled. Otherwise, your balance sheet could be wrong, saying that you owe less to a credit card company, or on a loan, that is actually due. That's not the kind of surprise you want.

Any single account that you reconcile is a good thing. However, the world of accounting is a double entry system. That means that even though one side of the transaction is correct, say the check you wrote to the electric company, it doesn't necessarily follow that the other side was recorded as a utility expense. To illustrate how to verify these 'other sides', let's use an example of making an amortized loan payment.

When you reconcile the bank statement, you see that the check did clear the bank. Your books' banking account balance reflects the reduction, and your bank balance was reduced as well. So far, so good. In this case, part of the loan payment goes toward the principle, which shows up on the balance sheet, and part is interest, which shows on the income statement. What about those other sides, the principle and the interest?

First, the part that affects the balance sheet: The best way to know you recorded the appropriate amount as principle is then to reconcile the loan account with the periodic loan statement you receive. If you don't receive a statement routinely, request one, and stay on top of it! Loan companies are staffed by humans, and therefore can make mistakes. That takes care of the principle, and the balance sheet side.

Second, the part that affects the income statement: It's pretty much math - Total Check Amount minus Principle Repayment equals Interest Expense. Having said that, however, I suggest taking a look at your company's Income Statement, aka P&L. It will have an expense line named Interest Expense. Does that line show the amount you expect it to show? There may not be actual 'statements' against which to reconcile, but you probably have a budget, or a darn good feel for what it should be.

Most small businesses pay attention to their income statements, as they should. But ignoring the balance sheet and its accounts is very unwise. Reconciling all possible balance sheet accounts, and looking for reasonability and trends on the income statement, will give you a good picture of the health of your company.

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