How to do a Bank Reconciliation

A bank reconciliation is an important process that every small business owner should perform to ensure that the company records and bank accounts are correct and corresponding.

Cash on the balance sheet illustrates a company’s ability to pay debts and fund operations, but how do you know the bank statement balance is accurate? Bank reconciliations help bookkeepers, accountants, and users of financial statements rely on the cash account. Below are details regarding what a bank reconciliation is and how it adds value to financial reporting.

What Is A Bank Reconciliation?

A bank reconciliation is a comparison of the transactions from the book balance or bank statements, and the ending bank account balance, to the ending cash balance in the general ledger. Businesses will maintain a cash book to record both bank transactions as well as cash transactions and complete them at regular intervals to ensure the cash records and bank records are correct. The cash column in the cash book shows the available cash, while the bank column shows the cash at the bank.

The reconciliation lists the differences between the banking transactions and the general ledger account, such as outstanding checks that haven’t cleared the bank. Other items, such as deposits in transit, payments, bank service charges, and withdrawals in transit, are also listed. Items that are not considered timing differences are noted on the reconciliation as reconciling items.

When Is A Bank Reconciliation Prepared?

A reconciliation between the bank statement and the general ledger cash account is typically done once a month, once the bank statement is received from the bank. When this process is completed, the typical reconciliation package is filed and contains the reconciliation and a copy of the bank statement. This process is one of the most basic and important internal controls over financial reporting. As such, it is an essential process that all accounting professionals need to understand as they are a way to double check to ensure accounts receivable aren’t getting out of control.

Bank Reconciliation Example

Most often the bank reconciliation process can be completed within a ledger system module. However, accountants often complete the reconciliation in Excel. The reconciliation can be formatted in many different ways, but the concept of documenting the difference between the bank cash balance and the ledger cash balance is the same. Using one bank reconciliation example, a reconciliation may list the bank ending balance at the top of the page. Next timing items, such as outstanding checks and deposits in transit, may be listed.

Reconciling journal entries such as service fees, bank fees, payments to customers, and accounting errors would follow. Ultimately, the ending bank balance, timing items, and reconciling items would be used to calculate an adjusted company’s cash balance. The adjusted cash balance should match the general ledger account balance. If it doesn’t, the account reconciliation is incomplete or contains errors. It’s very important that all differences between the bank statement and the general ledger are itemized. If not, errors can cause the cash account balance to be inaccurate.

Why Are Bank Reconciliations Important?

Reconciliations are important because they ensure that accounting records are accurate and that management has a clear idea of cash on the balance sheet. A bank reconciliation statement is effective for catching errors, whether they’re made by accountants or by the bank. As such, they are one of the most basic and essential forms of internal control over financial reporting. When inconsistencies or errors are identified and corrected, they have a real cash impact on the balance sheet and reducing or eliminating non sufficient funds (NSF).

Reconciliations 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 terms you will use 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 3 pm on the last day of your bank statement issuance are usually the “deposits in transit. “
  • Outstanding Checks – Also referred to as uncleared 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 part 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.

How To Prepare A Bank Reconciliation

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

  1. Log into your accounting program and pull up the reconciliation section.
  2. Enter the ending date and ending balance from your monthly bank statement.
  3. Check off all the checks that have cleared your bank and recorded on your bank statement.
  4. Check off all 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 charges, adjustments, or interest in your accounting data. Some software has a place to do this when you enter the ending date and closing 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 errors. Banks rarely make mistakes, but they do make them so jump on it quickly!
  • Recording errors. 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 the company’s records in order to balance your financial records 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.

The cash balance on the general ledger is of the utmost importance. It gives managers and financial statement users insight into a company’s cash position, and bank reconciliations help ensure the business records are accurate. Use bank reconciliations regularly to verify the statement balance and enhance internal controls of the company.