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The Truth of a Transaction: How to Resolve a Confusion in Your Business Finances

Updated: Jul 7, 2022


It can be a challenge to sort out a confusion, especially when it pertains to your finances. We’ve all asked ourselves at one time or another, “Why won’t this balance?”




This article will give you some basic tools to help you get to the bottom of those frustrating conundrums and to help prevent them from happening.


Reconciliation

Reconciling your bank and credit card statements each month is a pretty vital part of managing your business finances. To reconcile an account means to match it up transaction by transaction to eliminate any discrepancies. The purpose of this is to verify that what your software says happened in your account matches what the bank says happened in your account. With a disagreement here it could be impossible to really know how much money you have, which would make it very hard to manage your business.


Accounts that won’t reconcile have an inaccuracy somewhere. The simplicity of reconciliation is that the transactions in your software must match the transactions on your bank statement.


The Bank Statement

The bank statement is fact. When uncertain of a transaction or some part of a transaction, go back to the bank statement and use that to determine the truth of the matter. The bank statement is your stable, unmoving target. You then move the pieces around in your accounting software to match it.


Even if there is something on the bank statement that never should have happened, such as a fraudulent charge or a waived bank fee, it should be entered as is. The correction that comes later will then be on a following bank statement and will wash out the error when you enter and reconcile for that month.


This is a service to your future self, as discrepancies always raise questions, even if they are from long ago. If the software looks exactly like the bank statements, it’s far less likely to raise questions and even when it does, the answers are usually very apparent. Although, in a very confusing situation, I do highly recommend making thorough notes for your future self. You’ll thank yourself later.


The Truth

The truth is the only way to go when entering a financial transaction. You could fudge the dates to show all your monthly expenses in their correct months rather than when they were actually paid or you can lump multiple transactions together because that’s how you wish it were done, there are many ways you can disregard the truth when entering a transaction. I strongly advise you to resist the temptation. When the truth of the transaction is fully represented in your software you are far less likely to fall victim to it, which could happen in any number of ways.


Arbitrary Categorization

Avoid arbitrarily categorizing or assigning transactions. This can be very confusing for you later. When you come across a transaction that you can’t seem to categorize, don’t jump straight to setting up a new expense category or income category. It can be very hard to really see where your company is making, spending or losing money when your software has tons of categories that really could be gathered under one parent category or even lumped into a single category. When creating an expense category or an income category, ask yourself, “will enough transactions go into this category to make it worth having or is there an existing one that would be better?”


Summary

In summary, the bank statement is your financial gospel. All you really need to do is add to your accounting software those things which are on your bank statement and take away those things which are not. When it gets more complex than this, which we all know it can, remember to bring it back to basics and ask yourself, “what does the bank statement say?”


IMPORTANT NOTE: Though Journal Entries made by your accountant or bookkeeper rarely appear on the bank statement, please never delete these without consulting a professional.

I hope this article has been helpful to you in making the right bookkeeping decisions for your business.


If you have any questions about bookkeeping or are considering hiring a bookkeeper for your business, please feel free to contact us at info@peggysbookkeeping.com.


Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.


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