Bank Reconciliation: A Beginner's Guide

In this article we will be discussing what a bank reconciliation is, how to do a bank reconciliation, and why bank reconciliation is important for your business.

what is bank reconciliation

What is Bank Reconciliation?

Bank reconciliation is the process of matching your accounting records with your actual bank statements in order to identify errors and ensure the accuracy of your books.

How To Do A Bank Reconciliation (Step-By-Step Process)

1) Collect Bank Records

Normally, this is done by downloading your bank statement directly from your bank's website.

You will use this bank statement to check the accuracy of your own business' books.

2) Collect Business Records

Your business records refer to where you record all of the incoming and outgoing transactions within your business.

Generally, these transactions are either recorded on a spreadsheet or within your accounting software.

3) Decide On Your Starting Point

Find the last time that the balance in your accounting records perfectly matched with the the balance on your bank statements and use that as your starting point.

4) Compare Bank Deposits to Income Recorded on the Books

Go through all of the deposits in your bank account and make sure that each deposit on the bank statement has a matching entry within your accounting records. If something is missing, be sure to enter it.

5) Compare Bank Withdrawals to Expenses Recorded on the Books

Go through all of the withdrawals in your bank account and make sure that each withdrawal on the bank statement has a matching entry within your accounting records. If something is missing, be sure to enter it.

6) End Balance

After you have gone through each of the deposits and withdrawals listed on your bank statement and added any missing entries into your accounting records, your bank balance and book balance should match.

This will now be the starting date for your next bank reconciliation.

Common Bank Reconciliation Issues

Uncleared Checks

Uncleared checks are checks that have been sent out but have not cleared the bank yet, which can cause a discrepancy between your records and your bank statement.

Returned Deposited Checks

If a customer has insufficient funds in their bank account and the bank is unable to process their payment, the check will not be able to be processed by the banking system but your bookkeeper may have already recorded the income on your books which would cause a discrepancy and require an adjustment during the bank reconciliation process.

Bank Service Fees

Many banks have service fees associated with their accounts, with the exact fee amount sometimes not being known until the monthly bank statement is released.

During the reconciliation process these service fees will need to be recorded in your books.

Bank Reconciliation Benefits

Catch Mistakes

The bank reconciliation process helps identify errors that may have been made by the accounting staff throughout the period, as well as banking errors that may have occurred.

Although banking errors are rare, it is still necessary to have procedures in place to deal with the issue should it arise within your business.

Catch Potential Fraud

A bank reconciliation can help a company quickly identify fraud as well.

For example, if the same check is listed at a higher amount on your bank statement than what is recorded in your books, it will easily identifiable during the bank reconciliation process.

Understand Your Cash Position

Understanding how much cash you have on hand as well as the increase or decrease in cash over a certain period is absolutely crucial for the success of any business.

Simply put, cash is the lifeblood of a business and conducting routine bank reconciliations will allow you to stay informed about how much cash you have on hand.

Bank Reconciliation Example

The fictional company ABC Painters is conducting a bank reconciliation as part of their end-of-month procedures.

The ABC Painters bank account shows $20,000 but the company's books show $22,200.

The accountant begins the reconciliation process in order to find the discrepancy.

The accountant immediately notices a service fee of $200 on the bank statement that isn't recorded on the books and $2,000 of checks that have not yet been deposited in the bank, but have been recorded on the books.

The accountant makes the necessary adjustments and has completed the bank reconciliation for this period.

Bank Reconciliation FAQs

How Often Should I Reconcile Bank Accounts?

Generally, how often you reconcile your accounts will depend on the transaction volume of your business.

In other words, if you run a very large business that is doing hundreds of transactions each day, you may want to reconcile your accounts weekly or even daily to ensure that all cash is always accounted for.

However, if you run a smaller business with less transactions, such as ten transactions a week, you may only need to reconcile each month or quarter in order to stay on top of your cash position.

What is the Purpose of Bank Reconciliation?

The main purpose of the bank reconciliation process is to identify and correct any errors that may have occurred during the period, either by the accounting staff or even sometimes the banking system.

Bank reconciliations provide reassurance that what you have recorded within your accounting records perfectly matches what's actually on your bank statement.

What is a Bank Reconciliation Statement?

A bank reconciliation statement is a statement that shows what adjustments were made to a company's bank balance and its accounting records during the bank reconciliation process.

Bank Reconciliation: Conclusion

Bank reconciliations are used to ensure that the data within your accounting books actually matches the correct totals from your bank statements.

Bank reconciliations are a great way to guarantee the correctness of your books at the end of each period and provide a sort of insurance that the books have been kept accurately.

Other benefits of bank reconciliation include possible fraud protection as well as the ability to gain highly valuable insights about your cash position on a regular basis.

It is best to conduct bank reconciliations as frequently as possible, especially if you run a large enterprise, however the frequency of your bank reconciliations will largely depend on the frequency and volume of transactions that flow through your business.

How Noon Can Help Your Business Thrive

Noon Bookkeeping is an outsourced bookkeeping and accounting solution for business owners consisting of a team of CPA's and certified, expert bookkeepers ready to help you organize the finances of your business.

Noon can handle all of your bookkeeping in one place so that you can focus on running and growing your unique business knowing that we’ve got your finances handled.

Learn more about how Noon can help you take control of your finances.

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