How to do a Bank Reconciliation

A bank reconciliation is an important process that every small business owner should perform to ensure that their financial records and their bank statement are correct and corresponding.

See step by step instructions below on reconciling your accounts..

Why should you do a bank reconciliation?

One of the most important tasks a small business owner can perform is a bank reconciliation!

Reconciling your bank statement compares your accounting data to what the bank has recorded.

This process enables you to identify any discrepancies in your account records or even possible bank errors.

It will also help to identify any checks that have not cleared your account.

A bank reconciliation should be done as soon as possible after obtaining your bank statement!

Bank Reconciliation Terms

Before we review the following steps for reconciling your account(s), let’s go over some of the terms you will be using in the reconciliation process:

  • Deposits in Transit – Cash or checks received and recorded by your small business, but not yet recorded by your bank. Deposits you made after 3pm on the last day of your bank statement issuance are usually the “deposits in transit“.
  • Outstanding Checks – Checks written and recorded in your accounting records and/or checkbook, but have not “cleared” your bank yet. Checks written toward the end of the month are usually pat of your outstanding checks.
  • NSF Checks – The acronym “NSF” stands for “not sufficient funds“. These are checks that you deposited, but the bank was not able to process the check due to insufficient funds in the payer’s account.

Reconciliation Process

The following reconciliation steps assumes that you are using accounting software to perform your reconciliation:

  1. Log into your accounting software and pull up the reconciliation section.
  2. Enter the ending date and balance from your bank statement.
  3. Check off all of the checks that have cleared your bank and recorded on your bank statement.
  4. Check off all of the deposits that have cleared your bank and are listed on your bank statement.
  5. If you haven’t done it already, click the “finish later” button and record the bank charge or interest in your accounting data. Some software has a place to do this when you enter the ending date and balance from your statement.
  6. If you have a difference of $0, pat yourself on the back, hit the “finish now” button, and print off the bank reconciliation statement. This statement needs to be filed with your bank statement and filed in a safe place.
  7. If the balances do not match, you are going to have to continue reviewing the reconciliation and find the “differences”. See the box below for possible reconciling issues.
  • Bank error. Banks rarely make mistakes, but they do make them so jump on it quickly!
  • Recording error. A check or deposit might have been recorded incorrectly in your accounting records. A common error is a transposition. For example, a check was written for $98, but was recorded in your accounting ¬†software as $89. If the amount you are off is divisible by nine, it is likely to be a transposition. You will need to compare each check and deposit in the bank statement to find it.
  • Missing data. A sale or written check was erroneously omitted and not recorded in your accounting software.

 

Additional reconciling problems:

NSF check. Your bank will have deducted the amount of the NSF check from your account, so you will need to deduct the amount from your Cash account.

Check printing charge, bank fee, or interest earned. Sometimes you do not know these amounts until you receive your bank statement. They will need to be recorded in your accounting records in order to balance your accounting record with your bank statement.

Automatic payment. These types of payments are sometimes forgotten. If it is a monthly occurrence consider creating a memorized and reoccurring transaction in your software.

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