What is Bank Reconciliation & Why Is It Important

What is Bank Reconciliation?

Bank reconciliation is an accounting process in which a company’s records are reconciled with its bank statements to make sure that the balances match. It entails tallying the transactions recorded in the company’s books (deposits, withdrawals, payments, etc.) with those listed on the bank statement.

Beyond merely matching records, bank reconciliation serves as a crucial internal control mechanism. It provides a systematic way to verify that all transactions have been properly recorded and accounted for, reducing the risk of financial misstatements. This process helps identify differences, whether they are errors, omissions, or unauthorized transactions, between the organization’s internal records and the bank records. Verification of these two independent sets of records ensures consistency and helps businesses maintain the integrity of their financial data.

What are the 3 Types of Bank Reconciliation?

Bank reconciliation is a financial procedure in which records of a company’s transactions are compared to its bank statements to ensure consistency and accuracy. To carry out this process, companies may choose different types of bank reconciliation methods. Let us look at the three primary forms of bank reconciliation below:

1.) Periodic reconciliation

Periodic reconciliation involves checking the transactions of corresponding accounts periodically, usually on a monthly basis. This approach ensures that inconsistencies are proactively detected and corrected before they become a problem. Through regular reconciliation, financial records remain accurate and up-to-date.

2.) Continuous reconciliation

Continuous reconciliation is a process that involves matching transactions in real-time or on a daily basis. This strategy enables businesses to keep their financial records consistently accurate. Continuous reconciliation is especially useful for firms with high transaction volumes since it helps to swiftly discover and rectify differences.

3.) Inter-company reconciliation

Inter-company reconciliation is a process that involves comparing and matching inter-company transactions between different companies under the same organization. This becomes critical for firms that have several subsidiaries or divisions, whereby inter-company transactions should be correctly captured to ensure accuracy in consolidated financial reporting.

What is the Purpose of Bank Reconciliation?

Bank reconciliation plays an important role in getting detailed visibility into cash availability, accurate reporting, fraud detection, faster financial close, and facilitating seamless audits. Regular bank reconciliations can help businesses proactively identify any conflicting items on bank statements and take prompt actions. It is imperative for businesses to be prepared for regular bank reconciliations and to adopt best practices in reconciliation, as transaction volume increases. Here are some of reasons why businesses should prioritize bank reconciliation processes:

• Accuracy: It ensures the accuracy of financial records through the identification and rectification of discrepancies.
• Fraud Detection: It helps detect unauthorized transactions and probable fraud by the regular review and transaction matching.
• Financial Control: It gives better control of cash and proper management of overall finance since all transactions are accurately recorded.
• Compliance: Ensures compliance with regulatory and audit requirements, providing detailed and accurate financial statements.
• Error Identification: Identifies errors in both the company’s records and the bank’s statements, ensuring all transactions are accurately recorded.
• Cash Flow Management: It assists in effective cash flow management by providing a clear picture of available funds and financial health.

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The Most Common Payroll Errors

Effective payroll management requires making sure your employees receive correct payments, on time, and in compliance with applicable laws. However, without the right tools and resources, employee payroll can be a minefield for errors that can cost employees—and your company—time and money. Follow these tips to identify and avoid the most common payroll errors...

Misclassifying employees 

Misclassifying employees can result in incorrect pay, ultimately leading to overpayment or underpayment of wages. One of the most common misclassification errors is making an incorrect determination about whether an employee should be exempt from overtime. Per the Fair Labor Standards Act (FLSA), all employees must receive overtime pay for any hours worked over 40 hours per week, unless they are classified as exempt. Classifying a non-exempt employee as exempt not only opens your organization to FLSA-related fines, but can also cause an employee to miss out on overtime earnings.

Another common payroll error happens when an individual is classified as an independent contractor rather than an employee. A misclassification error often results in having to research historical payroll records and make retroactive payments or other adjustments to employee pay. In 2019 alone, the US Wage and Hour Division of the Department of Labor recovered a record $322 million in back pay for misclassified employees. Misclassification not only creates trust issues with your employees, but it is also likely to cost your organization money.

Miscalculating pay

An incorrect paycheck can be frustrating for any employee, particularly if the error results in missed payments. Miscalculations also waste time, as you’ll need to dedicate hours or even days to investigate and correct errors outside of the regular payroll cycle. 

According to an American Productivity & Quality Center (APQC) study, organizations take between two and ten days to resolve a payroll error. In the time it takes to fix those errors, employees can grow frustrated or even have trouble paying their bills. While you want to avoid any payroll error, the least you can do is write an employee payroll error letter to let them know what happened and what you're doing to resolve the issue.

Pay miscalculations can happen with salaried or hourly employees. Common miscalculation scenarios include the following:

• Overpaying or underpaying employees
• Making erroneous retroactive payments
• Missing the first paycheck for new hires
• Deducting the wrong amount for benefits or other payroll deductions
• Improperly paying employees who are on disability or other leaves

Not tracking employee hours and overtime

Incorrectly logged overtime hours can lead to improper overtime payments, which leads to corrections possibly spanning across multiple tax years. Correcting those errors takes time and can be incredibly unsettling for employees, whether they are underpaid or overpaid and have to return money to the company. Paying overtime is not just a matter of paying employees the standard 1.5 times their normal pay rate when they work over 40 hours in a week. Overtime payment errors can arise if you miss a payment in any of the following scenarios:

• When employees work during break times
• When employees spend time traveling between work sites
• When employees are required to participate in activities outside of normal hours, for example, in training, teambuilding, or company parties

 

Not reporting all forms of taxable employee compensation

Employee pay comprises more than salary, overtime, commissions, or bonuses. In addition to reporting the more traditional forms of employee pay, you also need to report other forms of taxable compensation to the IRS, such as:

• Stock options and other equity awards
• Employee rewards such as gift cards or travel awards
• Personal use of a company car

A small gift or award to an employee may not seem like compensation, but the IRS may view it as part of your payroll. Not reporting these other forms of compensation can result in tax filing penalties for your organization and the affected employees. 

Incomplete or disorganized records

An unorganized and inefficient payroll process can be a recipe for disaster. Relying on paper processes, manual data entry, or a mass of Excel spreadsheets leads to errors that may take weeks or months to uncover. Disorganized records can also lead you to miss an employee payment or follow-up on items needing urgent attention. Also, having a manual system for managing payroll increases your reliance on one person to manage all payroll actions. Without an organized and automated payroll system, it’s harder for someone to fill in when the payroll manager is out of the office or leaves the company. It can also set you up for problems in the event of an audit or process review. Source

What Is the Difference Between Single-Entry Accounting and Double-Entry Accounting?

In single-entry accounting, when a business completes a transaction, it records that transaction in only one account. For example, if a business sells a good, the expenses of the good are recorded when it is purchased, and the revenue is recorded when the good is sold.

With double-entry accounting, when the good is purchased, it records an increase in inventory and a decrease in assets. When the good is sold, it records a decrease in inventory and an increase in cash (assets). Double-entry accounting provides a holistic view of a company’s transactions and a clearer financial picture.

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The Importance of Internet and Email Security for Your Business

In today’s digital world, protecting your business goes far beyond your financial records — it includes safeguarding your online activity too. Cyber threats like phishing emails, malware, and data breaches can cause serious headaches for businesses of any size, leading to financial loss, identity theft, or compromised client information.

At Powers Bookkeeping, we see how quickly one bad click can create a major problem. That’s why it’s so important to stay alert:

• Verify Emails: Be cautious of unexpected emails asking for payments, account changes, or sensitive information.
• Use Strong Passwords: Change passwords regularly and avoid using the same one across multiple accounts.
• Update Software: Keep your antivirus, firewalls, and software up-to-date to protect against known vulnerabilities.
• Train Your Team: Make sure employees know how to recognize suspicious activity and understand security protocols.

A little awareness goes a long way in protecting your business and your finances. If you ever have questions about keeping your financial data safe, we’re always here to help. 

Happy Fathers Day!

 

 

Happy Fathers Day to all the Dads out there in every form from us at Powers Bookkeeping! Hope you have a wonderful day celebrating everything you do and are!

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The Benefits of Using Spreadsheets in Accounting

Spreadsheets are commonly used to analyze money that has been spent and income that has been received. They allow you to split the amount of money you have spent and received by time period and source. For example, you can separate out different types of expenditure such as rent or insurance, and track exactly how much can been spent on these in each month, by using a simple table.

1. Easy payment tracking

Another benefit of using spreadsheets is that you can link worksheets together. This is useful for things like cash flow, where you need to link the actual balance in the bank at the end of last month to the opening balance for this month. To do this, just press = in the cell that you want to link from, and put the cursor in the cell you want to link to. This works well for budgets too, especially if you have completed a production budget in one worksheet, and this needs to link to the master budget. Then, if the production budget changes, it automatically updates the master budget.

2. Linking related data

When working with lots of financial data, you’ll want to make it as easy to navigate as possible. Thankfully, most spreadsheet software offers a variety of tools to help you make your spreadsheets visually appealing and easy to understand. For example, you can use Ctrl + B when a cell is selected to make all of the text in that cell bold, which is useful for quickly helping titles and labels to stand out.

You might also choose to color code cells, and then sort your data by color.

3. Useful formatting

When working with lots of financial data, you’ll want to make it as easy to navigate as possible. Thankfully, most spreadsheet software offers a variety of tools to help you make your spreadsheets visually appealing and easy to understand. For example, you can use Ctrl + B when a cell is selected to make all of the text in that cell bold, which is useful for quickly helping titles and labels to stand out.

You might also choose to color code cells, and then sort your data by color.

4. Spreadsheet functions

• IF statements; The use of functionality such as IF statements is very useful in accounting. Imagine you have to analyse the amount of money spent on wages for a month. You could use an IF statement to indicate whether or not a member of staff has been paid overtime. This could be something as simple as: = if(A1>37, Yes, No)
• This means that if the number of hours indicated in cell A1 is greater than 37 hours, the answer ‘Yes’ will be generated; otherwise, ‘No’ will be selected.
• IF statements can also be used in calculations. So if we are looking at the sales staff for an organisation, it may be that if they make sales greater than £5,000, in a week we give them 0.5% of the total sale value. This can be achieved by the following function: =if(A1>5000, cell A3*0.05, 0)

The SUM function

This is a very quick and easy function that saves an awful lot of time. Rather than adding up huge amounts of data on your calculator, you can reach a total just by selecting the SUM function, and highlighting everything to be included.

LOOKUP functions

A tool in Excel that is used often by accountants is the HLOOKUP or VLOOKUP. This function searches for information associated with specified information, and can be extremely useful in a stock control environment. For example, if you want to know if a particular part is in stock, you can use a HLOOKUP to find out the number of items associated with a particular item number. The makes the process of searching for values related to other values much quicker. Source

5 Simple Ways To Separate Your Personal and Business Finances

Effective financial management is crucial to good business management. But handling business finances is often a learning process for new entrepreneurs, especially when it comes to keeping personal and business finances separate. Research shows some small business owners don’t have a separate business credit card. According to one 2022 survey on business credit usage, only 20% of business owners had a credit card, and 42% of respondents said they’d had the card for less than a year. The research suggests small business owners are likely using either personal savings or a personal credit card to cover their business expenses. Commingling business and personal finances can make managing your overall business more complicated. Here are five simple ways to help keep them separate;

1.) Open a separate business bank account

If you haven’t done it yet, open a dedicated business checking account to manage your business income and expenses. Keeping everything separate from personal banking can simplify bookkeeping, accounting and tax management. You’ll be able to clearly see how much revenue you’ve made in a given period, your monthly overhead and financial trends in your business. Many business bank accounts now come with built-in financial management tools for budgeting, cash flow tracking and forecasting, so opening a separate account can help streamline your business’s financial operations.

2.) Apply for an Employee Identification Number

Nearly everyone has a Social Security number but when it comes to business, it’s best to use what’s called an Employee Identification Number (EIN) to maintain separation between your personal and business identities. Instead of your Social Security number, you’ll use this number on your W-9 form for clients during the onboarding process to set up payments. You’ll also use an EIN on your business tax return or the Schedule C on your individual tax return. Getting an EIN only takes a few minutes through an online application. Many banks require an EIN to open a business bank account.

3.) Use a business credit card

As the research shows, only two out of 10 business owners use a business credit card. However, this issue is more prevalent among some business owners who have traditionally lacked access to business credit and services. For example, only about 25% of Hispanic-owned small businesses have a business credit card, compared to 41% of non-Hispanic businesses. A business credit card can help you keep track of business-related transactions in one place, so you can see how much you’re spending and where to cut back if needed. A business credit card can build your business’s credit profile, which is important if you ever need a loan. Opening a business credit card with a local or online bank can help you establish a relationship with that financial institution that could serve your business well over the long term. Just be mindful about how and when you use the card, and that you fully understand what the IRS deems an allowable business expense. Otherwise, you may unknowingly make charges that aren’t tax deductible for your business.

4.) Use accounting software

Though your business bank account may come with integrated financial tools, purchasing separate accounting software can give you access to more sophisticated features and capabilities, which could be beneficial if you want more granular details or your business finances are more complex. Accounting software can provide an all-in-one financial management solution for expense tracking, invoicing and financial reporting. By handling only business-related transactions, such software can ensure greater accuracy for activities such as categorizing expenses, annual tax filings, quarterly estimated tax payments and even complying with a potential audit.

5.) Consult a professional

As a business owner, you’re likely focused on overseeing your day-to-day operations, getting products out the door and serving customers. Managing your small business finances on top of all these responsibilities can be overwhelming, which is why it never hurts to get help from a financial professional. According to a National Federation of Independent Business survey, only 41% of business owners regularly talk to someone at their bank about their business’s finances. Separate industry research indicates less than half of small business owners (48%) are confident they are correctly paying their taxes. Getting advice from an accountant, financial advisor or business banking specialist at your bank can help with tax compliance and financial planning, and can help ensure you keep your business and personal finances separate to maintain accurate financial records.

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How is Your Retirement Savings Taxed?

The question above poses a straightforward question.  Unfortunately, like many tax matters, the answer is, “It depends.” When you save money in a workplace retirement plan such as a 401(k) or 403(b), you receive a tax deduction for your contribution.  Consequently, by putting money away for your future in a 401(k), you also save tax dollars today.  A regular IRA might work the same way, but it also might not. Depending on whether you have a workplace retirement plan available and your modified adjusted gross income (also known as “MAGI” which is IRS-speak for your income, more or less), your regular IRA contribution might be deductible. 

The rules for a Roth IRA are much simple— no tax deduction is permitted for any contribution;

Taxes on Your Retirement Saving . . . While You’re Working

You’ll of course hope your retirement plan money grows during the many years between when you save it and when you take it out to enjoy during your golden years.  As the last few years have unfortunately demonstrated, there’s no certainty such growth will happen. Nonetheless, over the very long term, intelligent investors ought to see significant growth over the decades.

How do taxes affect such growth? Thanks to a concept known as tax-deferral, none of your retirement plan money is taxed while it grows. Said another way, you’ll pay no tax on the money your 401(k) or regular IRA earns during your working career.  Furthermore, there’s no limit to how much it earns; you’ll still pay no tax on the growth.  However, should you take out even a single dollar from your plan prior to retirement, you’ll owe income tax. You might even owe a penalty tax on such an early distribution.

Keep in mind you can get some of your money out of your Roth IRA without paying income tax.  However, because of the long-term upside of Roth IRAs discussed in the next section, you’ll want to avoid doing so. (Retirement plans are for saving for retirement—the government gives you pretty big incentives to use them that way. Take advantage.)

Taxes on Your Retirement Saving . . . While You’re Retiring

I’ve heard spending one’s retirement plan funds is much more enjoyable than putting money in them.  Makes sense; after all, it’s why you’ve saved all along. If there’s a downside to the “harvesting” on your retirement plans, it’s that during retirement is when you begin to start paying for those tax breaks you received earlier.  Still, there are a few very important distinctions between how the various retirement plan distributions are taxed.

Distributions from regular IRAs and 401(k)s are taxed as ordinary income. In English, this means you’ll pay normal federal income tax (state income tax too, depending on the rules for the state in which you live), based on the amount you take out of your accounts.  Once you reach age 59 ½, you can take out as much as you want without any early distribution penalty. However, you do not need to start distributing money from your regular IRA and 401(k) plan at that time. In fact, not until after you reach age 70 ½ must you begin to take from those accounts From that point forward, you must take your required minimum distribution from your qualified retirement plans or face a significant penalty.

One retirement plan really shows its dramatic upside during retirement. Recall how a saving contribution to a Roth IRA provides no upfront tax deduction.  In retirement, however, distributions from Roth IRAs are not subject to federal income tax.  Consequently, the potentially enormous growth over the many years between saving and retirement is never taxed.  Furthermore, Roth IRAs are not subject to required minimum distributions, so you can leave your money in the plan until you need it.

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5 Things to Know About Your Balance Sheet

Henry Ford said: “the two most important things in any company do not appear on its balance sheet: its reputation and its people.” Nonetheless, a balance sheet is an important financial statement for every business. Understanding what goes into a balance sheet and what it can tell you about your business is essential.

1. What a balance sheet is all about

A balance sheet is a statement of a business’s assets, liabilities, and owner’s equity as of any given date. Typically, a balance sheet is prepared at the end of set periods (e.g., every quarter; annually).

A balance sheet is comprised of two columns. The column on the left lists the assets of the company. The column on the right lists the liabilities and the owners’ equity. The total of liabilities and the owners’ equity equals the assets. To take the simplest example, say a company starts up by an owner who contributes $1,000 cash. The company has assets of $1,000, no liabilities, and owner’s equity (the owner’s contribution to the business) of $1,000, so both columns match up.

2. Debt ratio

The balance sheet presents a glimpse into how the company is doing financially. One of the key indices is the debt ratio, which is the ratio derived by comparing total debts to total assets. More precisely, divide total liabilities by total assets to obtain a percentage. For example, if a company has assets of $100,000 and debts of $55,000, the debt ratio is 55% ($55,000 ÷ $100,000).

If your assets can cover your debts, that’s fine, but it’s not advisable to have too much debt as compared with company assets. The larger the percentage (the debt ratio), the more the company is leveraged. This could present problems when a company is too heavily leveraged. The acceptable debt ratio varies according to industry.

3. Owner’s equity

In broad terms, owner’s equity is essentially what would be left for owners from company assets after paying off all liabilities. It’s what you have invested in the business.

For a sole proprietorship, equity represents the owner’s investment in the business (cash and property put into the business), minus any withdrawals (e.g., a monthly draw for personal living expenses).

For a corporation, owner’s equity is called shareholder equity. In general, it represents the value of corporate stock and retained earnings (undistributed amounts). There are some other adjustments that can be made.

Comparing owner’s equity from one period to the next shows you how your investment is doing. If owner’s equity declines, you need to review what’s going on and make changes. Maybe you need to pay off debts and reduce liabilities reported in the balance sheet. If owner’s equity is increasing, that’s a good thing. Keep it up!

4. Who looks at the balance sheet

As previously stated, the balance sheet is an important clue to a business owner about how his or her company is doing. But owners aren’t the only people looking at the balance sheet:

• Lenders typically look at this financial statement. For example, when applying for an SBA 7(a) loan over $350,000, a balance sheet is required.
• Investors and, when you put the company up for sale, buyers also look at a balance sheet to help assess the company’s financial position.

5. The balance sheet and tax reporting;

For federal income tax purposes, only C corporations are required to complete a balance sheet as part of their annual return. This balance sheet compares items at the beginning of the year with items at the end of the year. The IRS wants to see that the balance sheet included with Form 1120 agrees with the corporation’s books and records. Small corporations—those with total receipts and total assets less than $250,000 at the end of the year­—are not required to complete the balance sheet in the tax return. Source

6 Tips to Boost Your Chances of Personal Loan Approval

There’s no universal formula for getting approved for a personal loan. Requirements such as credit score and income vary by lender, and some online lenders consider nontraditional data, like employment history or education level. But loan companies have one thing in common: They want to be paid back on time, which means they approve only borrowers who meet their requirements. 

Here are six tips to boost your chances of qualifying for a personal loan plus some alternative borrowing methods;

1. Clean up your credit

Your credit score is a major consideration on a personal loan application. Generally, the higher your score, the better your chance of personal loan approval.

• Check your reports for errors. Common errors that may hurt your score include accounts incorrectly reported in your name, closed accounts reported as open and incorrect credit limits, according to the Consumer Financial Protection Bureau.
• Get on top of payments. If you’re not already, be diligent about making on-time payments toward all your debts, paying more than the minimums when possible. This will benefit your payment history and credit utilization ratio, which is the percentage of your available credit that you’re using. Together, your payment history and the amount of debt you owe make up 65% of a FICO credit score.
• Request a credit limit increase. Call the customer service numbers on the back of your credit cards and ask your creditors if you can get an increase without a hard credit check. This can be an easy way to lower your credit utilization ratio without having to pay down account balances. You have a better chance of getting a credit limit increase if your income has risen since you acquired the card and you haven’t missed any payments.

2. Rebalance your debts and income

Loan applications ask about your annual income, and you can include money earned from part-time work and other sources, like alimony or child support. Consider increasing your income by starting a side hustle or working toward a raise at your full-time job. Also, do what you can to pay down debt. Boosting your income and lowering your debt improves your debt-to-income ratio, the percentage of your monthly income that goes toward debt payments. A DTI under 36% is ideal, but lenders may accept higher debt-to-income ratios. A lower ratio shows that your current debt is under control and you can take on more.

3. Don’t ask for too much cash

Requesting more money than you need to reach your financial goal can be seen as risky by lenders and may make it harder to get approved. A larger personal loan also squeezes your budget, as higher loan payments impact your ability to meet other financial obligations, such as student loans or mortgage payments. Use the calculator below to estimate your potential monthly payment on a personal loan based on your desired loan amount, repayment term and estimated APR.

4. Consider a co-signer or co-borrower

If you have a fair or bad credit score (below 690), adding a co-signer or a co-borrower with stronger credit and income can increase your chances of approval. A co-signer essentially vouches for your ability to repay the loan while a co-borrower shares the loan funds and repayment responsibility. In both cases, failure to repay the loan will impact your co-applicant’s credit. Lenders may be more inclined to approve a co-signed or joint loan application, because it provides an additional person who is legally responsible for repaying the loan. Make sure anyone you ask to be a co-signer or co-borrower fully understands their obligations and the risks before agreeing.

5. Use collateral to secure the loan

You may have a better chance of loan approval if you apply for a secured loan. A secured loan requires you to pledge an asset that you own — typically a vehicle or savings account — as collateral that the lender can take if you don’t repay the loan as agreed. Secured personal loans are less risky for lenders than unsecured loans, because they can use the pledged asset to recoup any losses. Not all lenders offer secured loans, but those that do may have looser borrowing requirements or charge lower interest rates for secured loans.

6. Find the right lender

Each lender has its own requirements and may offer different loan amounts and features compared to other lenders. Do your research to see which lenders are most suitable for your financial situation and borrowing needs. If you meet a lender’s minimum qualification requirements and want to see estimated rates and terms, you can pre-qualify for a personal loan. Pre-qualifying usually triggers a soft credit pull, which does not impact your credit score. Pre-qualify with multiple lenders to compare rates and terms. The best loan option has low interest costs and monthly payments that fit into your budget.

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