What to consider when doing a bank reconciliation for a client

Banking is an essential part of any business operation. As an accountant, you know it’s key for businesses to have a clear and accurate picture of their financial health, but are you doing everything you can to help your clients achieve this?

Your clients must stay on top of their banking to maintain accurate financial records, and one way to do this is by performing regular bank reconciliations. Bank reconciliations help ensure the balances in the books match the balances in the bank account.

In this article, we’ll explore key aspects of the bank reconciliation process as well as the tax considerations accountants should keep in mind when performing these important reconciliations.

Factors to consider when completing bank reconciliations

Performing regular bank reconciliations is an important aspect of maintaining accurate financial records. When performing bank reconciliations for clients, accountants should consider several factors to ensure the reconciliation is accurate and complete. To ensure the bank reconciliation is as precise as possible, consider:

• Accuracy of transactions,
• Timing differences,
• Outstanding cheques and deposits, and
• Bank errors.

Accuracy of transactions

Accountants should ensure that all transactions on the bank statement match the transactions in the client’s accounting records. Any discrepancies should be noted, investigated, and/or adjusted. If there are any errors or discrepancies, the accountant should work with the client, or their bank where possible, to resolve the issue.

Timing differences

Timing differences such as uncleared cheques, deposits in transit, and bank fees that have not yet been posted can impact the balance of the bank account. These items need to be noted, and recorded where appropriate, to reconcile the bank account.

It is important to note that timing differences are a normal part of the reconciliation process and should be expected. Because of the nature of banking and bookkeeping, it’s rare there are no timing differences when performing a bank reconciliation.

Outstanding cheques and deposits

Outstanding cheques and deposits result from timing differences and can impact the balance of the bank account. Accountants should verify that all outstanding cheques and deposits have been cleared and posted to the bank account.

Cheques outstanding for a significant period of time should be investigated to determine why they are still outstanding. Since cheques not delivered in person can get lost in the mail, if they are outstanding for longer than 6 months, they may need to be reversed or reissued.

Bank errors

Bank errors like duplicate transactions, incorrect amounts, or missing transactions can impact the balance of the bank account.

These errors should be corrected in both the bank’s and the client’s records. In this case, either your client (or you if you have appropriate authorization) will need to contact the bank to rectify the error. In some instances, you may need to note the error and correct it in the following period’s bank reconciliation.

Bank Reconciliation Frequency

In addition to considering the above items to ensure an accurate bank reconciliation, you’ll want to discuss the frequency of bank reconciliations with your client. The more often reconciliations are performed, the more accurate the records will be, especially if your client has a high volume of transactions.

Monthly reconciliations are recommended, but it ultimately depends on the needs of the business. Businesses in industries with low-volume, high-priced items such as manufactured homes, will have fewer transactions per month than a high-volume, low-priced industry such as grocery stores. In this example, providing more frequent bank reconciliations for the grocery store will help them stay current with their bank balances and allow you to complete their reconciliation more efficiently.

Internal controls

There are several types of internal controls that can impact the bank reconciliation process. For example, one important internal control is the segregation of duties. This involves separating the tasks of handling cash and recording transactions to ensure that no single individual has complete control over the entire process. If this control is not in place, it increases the risk of errors and fraud.

Another important internal control is the use of accounting software with appropriate access controls. This helps ensure that only authorized individuals have access to financial data and can make changes to the accounting records. If these controls are not in place, your client increases the risk of unauthorized access, errors, and fraud.

Accountants should consider their client’s internal controls and periodically check to make sure they are being followed.

Overdrafts

Depending on the type of banking agreement your client has, it can be important to make sure they aren’t overdrawing their bank account. Overdrafts can result in fees and penalties that can be costly to the client. If an overdraft occurs, the accountant should work with the client to resolve the issue and prevent it from happening in the future. With proper cash management skills, the client can avoid using their overdraft in the future.

In some situations, an overdraft may be unavoidable. Businesses that are seasonal in nature and don’t have a consistent cash flow may need an overdraft to help get them through the slower sales periods. In this case, it’s pertinent for the business to ensure they have the right overdraft protection for their needs. As their accountant, you may be asked to assist with this. By understanding the impact of overdrafts, considering the tax implications, and implementing preventative measures, you can help your clients maintain strong financial health and avoid unnecessary fees and penalties.

Tax considerations for accountants when doing bank reconciliations

Effective rate vs. marginal rate

While bank reconciliations themselves do not directly impact taxes, accountants should consider the tax implications of bank reconciliations when analyzing the reconciliation and providing financial advice to their clients.

Effective tax rate

The effective tax rate is the total tax paid divided by the total taxable income. Accountants may need to consider the impact of bank reconciliations on the taxable income of their clients. For example, if the reconciliation uncovers previously unrecorded income, this may increase the taxable income and therefore increase the effective tax rate.

Similarly, if the reconciliation reveals previously unclaimed tax deductions, this may decrease the taxable income and therefore decrease the effective tax rate.

Marginal tax rate

The marginal tax rate is the tax rate applied to the last dollar earned, also commonly known as the tax bracket. Accountants may need to consider the impact of bank reconciliations on the client’s marginal tax rate when providing financial advice on future transactions.

For example, if a client is considering a new investment that would increase their taxable income, the accountant may need to analyze the impact of this investment on the client’s marginal tax rate and advise accordingly.

Sometimes clients have so much going on that they forget to mention these things to their accountant. Bank reconciliation can be instrumental in uncovering these types of transactions.

Analyzing bank reconciliation results for tax Purposes

When analyzing bank reconciliations for tax purposes, accountants should be mindful of potential implications that could impact their clients’ taxes. Here are a few examples that delve a little deeper into the tax implications of items that could be uncovered during a bank reconciliation.

• Discovering unrecorded income: A bank reconciliation might uncover income that was not recorded in the client’s books. This could be due to a missed deposit or an error in the accounting system. If unrecorded income is discovered, it will need to be reported on the client’s tax return, which could increase their taxable income and effective tax rate.
• Identifying previously unclaimed tax deductions: Conversely, a bank reconciliation could reveal expenses that were not recorded in the client’s books, resulting in previously unclaimed tax deductions. This could reduce the client’s taxable income and effective tax rate.
• Analyzing the impact of future transactions on taxes: Bank reconciliations can also be used to help clients plan for future transactions. For example, if a client is considering a new investment that would increase their taxable income, the accountant can analyze the impact of this investment on the client’s marginal tax rate and provide advice accordingly.

Overall, understanding the tax implications of bank reconciliations is critical for accountants. By analyzing the bank reconciliation, accountants can help their clients stay on top of their tax obligations and provide better accounting and tax advice.

Final Thoughts

Bank reconciliations are an essential part of maintaining accurate financial records. They help ensure that the balances in your clients’ books match the balances in their bank accounts. In some cases, it is your responsibility as an accountant to perform regular bank reconciliations for your clients to help them maintain accurate financial records.

When performing bank reconciliations, it’s important to consider factors like the accuracy of transactions, timing differences, bank errors, outstanding cheques and deposits, reconciliation frequency, internal controls, and overdrafts. Additionally, understanding the tax implications of bank reconciliations can help you provide better advice to your clients.

By analyzing bank reconciliation results for tax purposes, accountants can help clients stay on top of their tax obligations. Whether you are an experienced accountant or just starting in the field, keeping these principles in mind will help you maintain accurate financial records for your clients and provide the best service possible.

Editors note: This article was first published in June 2023 and has since been updated for relevance.