Bank Reconciliation: Guide To Balancing Your Bank Statements

Published on
December 14, 2023
Written by
Aaron Oh
Reviewed by
Episode #
Bank Reconciliation: Guide To Balancing Your Bank Statements
Explore the essentials of bank reconciliation, its importance, types, frequency, and tips for easier reconciliation. Plus, get answers to FAQs.
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Understanding the fiscal well-being of your business is crucial to its success. One of the most important tools you have at your disposal to do this is bank reconciliation. This process, although often overlooked, plays a fundamental role in maintaining the accuracy of your company's financial records. This piece will explore the ins and outs of an effective bank reconciliation process and provide tips on how to do bank reconciliation for your business.

What is Bank Reconciliation?

Understanding what is reconciliation in banking can help you better comprehend how to do bank reconciliation for your enterprise. Bank reconciliation is an accounting process that matches the company’s cash balance on its balance sheet to the matching amount on its bank statement. Reconciling the two accounts helps identify discrepancies so they can be resolved promptly. Termed as bank reconciliation accounting, it necessitates an in-depth examination of both the firm's internal accounting records and external bank statements to ensure comprehensive accounting of all financial transactions and maintain updated and accurate cash balances for business accounts.

The procedure begins with procuring pertinent financial documents, usually the company's balance sheet and bank statement. Each entry in these documents is cross-verified, focusing especially on deposits, withdrawals, and transactions influencing the cash account and the bank account balance. Discrepancies discovered are earmarked for further probe. Based on these findings, adjustments may be needed in the company's record to align the cash balance with the bank statement, thereby securing the accuracy and completeness of the company's financial data.

What is a bank reconciliation statement?

A bank reconciliation statement is a financial document that companies use to verify the accuracy of their accounting records by comparing them with the bank's records. It includes an assessment of all transactions, such as deposits and withdrawals, within a particular period. By identifying the errors and inconsistencies, a bank reconciliation statement effectively aids in managing cash flow, safeguarding the business from any fraudulent activities or financial discrepancies.

Why is Bank Reconciliation Accounting Important?

Bank reconciliation is integral for efficient financial management. A bank reconciliation statement ensures the bank's records align with yours, providing a clear, accurate picture of your financial position. It helps identify discrepancies that may result from bank charges, interest earned, or unrecorded transactions. Without it, you may have an inaccurate understanding of your cash position, leading to potential missteps in financial decision-making. Regular bank reconciliation also promotes financial discipline, as it requires consistent monitoring and review of transactions. It is a necessary tool to maintain financial transparency and accountability.

Here are some other key benefits of conducting regular accounting bank reconciliations:

  • Error Detection: Accounting bank reconciliation helps to identify bank errors, such as duplicate charges or unrecorded transactions.
  • Fraud Prevention: Provides a method to detect any unauthorized transactions, thus preventing fraud.
  • Financial Accuracy: Ensures accuracy in financial reporting, which is essential for decision-making.
  • Cash Flow Management: Offers a real-time understanding of available cash, aiding in effective cash flow management.
  • Regulatory Compliance: Assists in maintaining compliance with financial reporting standards and regulations.
  • Audit Readiness: Preps the business for audits by maintaining up-to-date and accurate financial records.

Types of Bank Reconciliation

There are several types of bank reconciliation processes that you can use for bank transactions, each with its own unique approach.

Internal Reconciliation

Internal reconciliation is a process conducted within a company to match its financial records with its bank statements. This method involves comparing the company's internal records, like the cash book, with the bank account statements to spot any errors. It helps maintain accurate financial records, identify discrepancies, and prevent fraud. This type of reconciliation is typically performed by the company's finance or accounting team, ensuring that all transactions are accounted for and that the company's financial health is accurately represented. 

External Reconciliation

External reconciliation, on the other hand, involves an external entity, like an auditor or a third-party service provider. In this process, the external party reviews the company's bank statements and compares them with the company's financial records. The purpose of external reconciliation is to provide an unbiased perspective and ensure that the  bank reconciliation statements and company’s financial records are accurate, reliable, and free from errors or fraud. This type of reconciliation offers an additional layer of security and can help to detect any discrepancies that may have been overlooked during the internal reconciliation process.

Aggregate Reconciliation

Aggregate reconciliation is a more comprehensive form of bank reconciliation. It involves reconciling a company's bank accounts at once rather than individually. This method provides a complete picture of the company's financial status and helps detect errors or discrepancies across multiple bank accounts. It allows corporates to better manage their cash flow and ensure accurate financial records. Aggregate bank reconciliation software is particularly useful for larger companies with multiple bank accounts, as it can provide a more holistic view of their financial health.

How Often Should Businesses Reconcile Their Bank Account?

The frequency of bank reconciliation largely depends on the size and complexity of your business. Small businesses with fewer transactions may reconcile their bank statements monthly. However, larger enterprises with more complex transactions and interest income may need to do this weekly or even daily. Regular reconciliation helps detect errors or discrepancies promptly, reducing the risk of financial mismanagement.

How to Reconcile a Bank Statement

Key Terms

Before you start the process, it's crucial to familiarize yourself with key terms used in the bank reconciliation process. These include:

  • Balance per Bank: This is the ending cash balance according to your bank statement.
  • Balance per Books: This is the ending cash balance according to your company's financial records.
  • Deposits in Transit: These are amounts received and recorded by a company but not yet recorded by its bank.
  • Outstanding Checks: These are checks that a company has written but haven't been deducted from the bank's record.
  • Adjustments: These are changes made to align the company’s records with the bank statement.
  • Income and Expenses: These represent the earnings and costs incurred by the business in a certain period. 
  • Deposit and Withdrawals: This is the money put into (deposits) or taken out (withdrawals) from the bank account.

Steps to Reconcile a Bank Statement

  1. Compare the Bank Statement and Your Business Ledger: Start by comparing your bank statement with your business accounting records. Look for any differences between the two.
  2. Identify the Causes of Discrepancies: If there are any discrepancies, identify their causes. This could include bank fees, interest earned, deposits in transit, outstanding checks, or errors.
  3. Adjust the Bank Balance: Adjust your bank balance to reflect any deposits in transit and outstanding checks.
  4. Adjust the Book Balance: Adjust your book balance to reflect any bank fees or interest earned.
  5. Verify the Adjusted Balances Match: After making these adjustments, verify that the adjusted balances of your bank and book match.
  6. Document for Future Reference: This includes noting the date, the reason for discrepancies, the adjustments made, and confirmation that the adjusted balances match.

Example

Suppose your business ledger shows a cash balance of $10,000, and your bank statement shows a balance of $9,000. On investigation, you find that there are $1,000 in deposits in transit. Thus, after adjusting  the accounting bank reconciliation statement for the deposits in transit, the adjusted bank balance matches the book balance, successfully reconciling the bank statement.

Tips for Making Bank Reconciliation Easier

Follow these tips to make your reconciliation process easier:

  • Automate Your Reconciliation Process: Utilise accounting software that can connect to your account and automatically reconcile transactions.
  • Regularly Reconcile Your Accounts: The more frequently you reconcile, the fewer transactions you'll need to review at once.
  • Keep Accurate Records: Ensure all transactions are recorded accurately in your business ledger.
  • Organize Your Transactions: Categorizing your transactions by type (income, expenses, etc) in your accounting software can make it easier to identify and track them during the reconciliation process.

Frequently Asked Questions About Bank Reconciliation

  1. What happens if you don't reconcile your bank statement? If you don't reconcile your bank statement, you may miss out on detecting errors, fraud, or discrepancies. This can lead to financial mismanagement and inaccurate financial reports.
  2. Do I need to reconcile my bank statement if I use online banking? Yes, even if you use online banking, it's crucial to reconcile your bank statement. Online banking provides real-time information but may not reflect checks that haven't yet cleared or deposits in transit.
  3. How often should I reconcile my bank statements? It’s recommended that you reconcile your bank statements monthly. Regular reconciliation helps keep track of your business’s financial status and quickly identify any potential errors or fraudulent activities.
  4. What is the role of a bookkeeper in bank reconciliation? A bookkeeper is responsible for performing bank reconciliations, identifying discrepancies between bank statements and the company’s records, making necessary adjustments, and ensuring the accuracy of financial accounts.
  5. Can bank reconciliation help in detecting fraud? Yes, bank reconciliation is a vital process that can help detect fraud. You can spot any unauthorized transactions or errors by identifying discrepancies between your bank statements and business records. 

Bank reconciliation is a crucial aspect of your business's financial management. It ensures the accuracy of your financial records, helps detect fraud, and aids in making informed business decisions. By understanding what bank reconciliation is, why it's important, and how to do it, you're taking a significant step toward ensuring your business's financial health.

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ABOUT THE AUTHOR
Aaron Oh is a seasoned content writer specialising in finance, insurance and tech industries. With a writing history at S&P Global, EdgeProp, Indeed, Prudential, and others, Aaron leverages finance knowledge and business insights to help businesses improve productivity and performance.
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