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How to Do a Bank Reconciliation (step-by-step)

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It’s the duty of any business, large or small, to keep accurate financial records to ensure things balance. 

Although fintech and automation are widely celebrated, there are still some accounting practices that need a keen set of human eyes. One of these tasks is bank reconciliation.

Overview of Bank Reconciliation

Bank reconciliation accounting is performed by the accounts payable department. It’s a means of comparing bank statements against a company’s personal records to spot any discrepancies, mistakes, cash manipulations, or fraudulent charges.

A bank reconciliation statement is produced after comparing the cash balance on a balance sheet to the corresponding balance on the bank statement. This act of reconciliation helps to identify whether accounting changes need to be made. 

Bank reconciliations are performed at consistent intervals, typically on a weekly or monthly basis. The longer you wait, the more likely discrepancies can occur. No system is perfect.

How to Prepare a Bank Reconciliation

Reconciling bank statements typically happens at the end of each month when your financial institution sends over your statement. 

The bank statement itemizes a company’s list of cash and other deposits made into the checking account of the business. It also includes charges, such as account servicing fees.

This is the statement you need to begin the bank reconciliation process. 
So, how do you complete a bank reconciliation? Here is the process:

Bank Reconciliation Steps

  1. Match the Deposits

    Once a bank statement is received, the first thing to do is compare deposits. Match the list of issued checks and deposits in the business records to those shown on the statement. 

    Compare the amount of each recorded deposit in the debit column of your cashbook with the credit side of the bank statement. 

    Then, match the credit side of the bank record with the debit side of the bank statement. Mark the item appearing in both records and identify any uncleared checks or deposits in transit. 

  2. Make the Bank Statement Adjustments

    The accounting records in-office should be used to adjust the bank statement. Using the cash balance shown on the statement, add back in any deposits “in transit”. These are amounts that are received and recorded by a business but not yet documented by the bank. 

    The next step is to deduct outstanding checks. These are checks that have been written and recorded in a company’s cash account, but have yet to clear the bank. In this case, they need to be added to the adjusted balance. 

    Outstanding checks happen when they are written at the end of the month and the bank doesn’t catch the transaction on time for the statement.

    The final step is to look for any bank errors. These are mistakes made by the bank while creating the bank statement. Common errors include:

    Entering an incorrect amount
    Omitting an amount

    All it takes to spot errors is comparing the general ledger to the bank statement. 

  3. Make the Cash Account Adjustments

    Now it’s time to adjust the cash balance in the business account. The bank adds its own fees and interest that must be accounted for and recorded in a company’s books as well. 

    Add any interest earned and notes receivable amount. You must also deduct any monthly service charges, overdraft fees, NSF checks, and accounting errors. This should either increase or decrease the cash account in the books, as you are reconciling both sides. 

  4. Compare the Balances

    Here’s where everything needs to check out and balance. After reconciliation, the adjusted bank balance and the company’s ending cash balance should be the same. If the ending balances are not equal, you must perform the bank rec all over again.

    Once both balances match, a business needs to prepare journal entries for the book adjustments. This is when a bank reconciliation statement is produced. 

    This statement reflects all the changes to cash balances for each month. It’s also used by auditors to conduct a company’s year-end audit.

How Frequently Should You Reconcile Your Bank Account?

When it comes to optimizing accounts payable management, reconciling your bank account is critical to staying on track. If you don’t ensure the business and bank are on the same page, tiny mistakes can snowball into huge problems. 

Small business owners may find that sufficient funds from the previous month are not enough. Mismatched end balances could lead to audits and heavy fines.

Ideally, an AP department should reconcile the bank account every time a statement is received. This can be done daily, weekly, or at the end of each month. It’s recommended a business with a high number of cash transactions reconcile more frequently to avoid mistakes.

Prior to reconciliation, a company should make sure all transactions have been recorded up to the end of the bank statement. Otherwise, the bookkeeping process will be more difficult. Especially if the accounting department has to chase paperwork and approvals. 

If you have online banking services, these statements can be downloaded. That way, AP can skip the need for manual entry.

The Importance of Bank Reconciliation

There are several benefits to the bank reconciliation process. In addition to keeping a company’s cash flow in line,  consider some of these advantages to a consistent reconciliation process:

  • The ability to quickly detect errors such as missed payments, double payments, miscalculations, etc.
  • Monitoring and adding service fees, bank fees, and penalties in the books
  • Keep close track of accounts payable (AP) and accounts receivable (AR) 
  • Hinder fraudulent transactions and theft
  • Account balance is accurate in the case of an audit

The Future of Bank Reconciliations

Accounting software enables a business to perform bank reconciliations on a more frequent basis. It makes the entire process easier and error-free. Bank transactions are automatically imported, giving staff the ability to match and categorize a large number of transactions with just the click of a button. 

Technology is making the entire bank reconciliation process more controllable, efficient, and reliable. The future of bank reconciliations is looking bright with streamlined workflows, less busy work, and a greater rate of success!

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