Is the bank statement where the year's accounts start?

Hook

Year end arrives and a lot of bosses hand over their accounts in the form of a stack of bank statements. "Money in is income, money out is expense — is the bank statement not all of it?" It sounds reasonable. Today we settle why the bank statement is not where bookkeeping starts. It matters a great deal, but it comes later in the queue.

The first trap: the invoice and the money are not the same thing

The nineteenth lesson set out the full chain: invoice, then collection, then bank reconciliation, three separate steps. Look only at the bank and the chain collapses into one step, and the problems begin. A customer settles three invoices with one payment — one line on the statement, and which three invoices were cleared? You cannot tell (the matching rule from the sixth lesson). Collecting through Stripe, iPay88 or GrabPay? What reaches the account is the net after the fee, so recording only the bank figure under-reports your turnover and loses the deductible fee expense as well. You lose on both ends.

The second trap: the money does not travel down only one river

The bank-statement method assumes all the business's money obediently passes through one account. In reality: the director's personal card paid for the company dinner and the software subscription (the advances from the sixth lesson); there is a second and a third bank — one used daily, with the fixed deposit and the loan at another, so handing over only the "main account" statement leaves a whole block of the balance sheet missing; and petty cash for small daily spending never touches a bank at all. Look only at the main account's statement and all those expenses evaporate — profit is overstated and you pay more tax.

The third trap: a statement holds only cash, not economic reality

A bank statement records when the money moved, not when the business happened. A private limited company keeps its books on the accrual basis. Take the job example from the tenth lesson: a deposit received in November, the work finished and the final payment collected in March; materials and labour already spent in December. Those costs have to be matched to the period in which they occurred, not the month the money arrived. And there is what a statement cannot see at all: depreciation — assets wear out year after year and not a sen moves through the bank; and accruals and prepayments (the sixth lesson) — what has been used but not paid, and what has been paid but not used, are both invisible to a statement.

So where does it correctly start?

The answer, as the twenty-first lesson said, is documents first. The correct order: source documents — invoices, bills, contracts, payroll — get posted first; then receipts and payments are matched back to those documents; and finally the bank statement enters, for reconciliation: does every entry in the books tie to the bank? The true role of a bank statement is not the starting point but the inspector at the terminus. It verifies that the books were done right; it cannot do the bookkeeping.

To close

In one line: a statement is a record of money; the books are a record of the business. Using a record of money to impersonate a record of the business loses the detail of income, misses the expenses that happened elsewhere, and skews the matching of periods. Got a box of jumbled documents? Or only statements? Grab a coffee first and talk about your business. For the accounting, come to LTT. I am LTT, helping SME bosses get their accounts straight. Follow us, and see you next time.