How To Do Bank Reconciliation for Your Business Latest Update 2023. The process of reconciling a bank account involves comparing the closing balance on a company’s bank statement to its internal book balance, which is the cash balance according to its accounting records.
To make sure that all deposits, withdrawals, and bank fees are taken into account, reconciliations are normally carried out once a month. Although differences between a bank statement and book balance are frequent, firms must account for each one and make the necessary adjustments to the general ledger. An organization can find any missing monies, avoid fraud, and confirm the cash flow on its balance sheet by performing a routine bank reconciliation.
What Is Bank Reconciliation?
Businesses should do a bank reconciliation process once a month to make sure that the amount shown on their bank statements corresponds to their internal accounting records. These documents contain a check register, the general ledger, and the balance sheet.
You typically need to change the book balance to conform to the bank statement because the closing balance on the business’s bank statement and its book balance is virtually never exactly the same. 1 Finding and comprehending these inconsistencies is the goal of carrying out a bank reconciliation. The balance on a bank reconciliation statement ought to match the closing balance of the bank account after all corrections have been made.
Why Bank Reconciliation Matters
An essential internal financial control tool for making sure that all of a company’s assets are accurately accounted for each month is bank reconciliation. This makes it possible to confirm that payments have been made and cash receipts have been placed into the bank.
The book balance and bank statement could be different for a number of reasons, including:
- Outstanding checks
- Deposits in transit
- Interest income
- Bank service charges
- Electronic payments and deposits that show up on the bank statement but haven’t yet been added to the ledger for the business
For instance, your bank may have assessed costs if you requested a wire transfer or delayed payment on a cheque. The general ledger of your company will not record any interest payments you received; instead, only your bank statement will show them at the end of the month.
How To Do Bank Reconciliation
Once bank statements are received, bank reconciliations are usually performed each month. Accounting software or manual labor can both be used to complete the procedure. The majority of accounting software programs, including Blackline, Xero, and Cashbook, offer bank connectivity, which means the platform digitally links with your bank and instantly pulls data from the most recent bank statements.
Prepare Your Documents
To account for any transactions not shown on the bank statement, you will need to refer to your company’s books, check register, and receipts when performing a bank reconciliation. These source documents should be kept in binders or online because they are crucial to reconciliation.
Review Deposits, Checks, and Debits
Use the last time balance on your company’s books and the balance on your bank statement as a starting point for bank reconciliation. Here are some crucial actions to take after obtaining this knowledge:
- Examine each and every deposit, check, and debit.
- Ensure that each deposit shows up in your account as income.
- Verify that any bank withdrawals (debits) have been entered into your company’s books. Included in this are things like bank fees that might not have been entered into your general ledger.
- Check your check register for any pending checks or in-transit deposits that might be confusing you. For instance, a check you recently issued may not have cleared or you might have taken checks on the day the bank statement closed.
- Look over your receipts to see whether there are any cash receipts that the bank did not instantly record.
Adjust for Outstanding Checks
A check that has been issued by the company and recorded in its general ledger accounts but hasn’t yet cleared the bank account on which it is written is referred to as an outstanding check in bank reconciliation. This indicates that the depositor has not yet cashed the check, which prevents the money from being taken out of your company’s bank account. As a result, the company’s bank balance will be higher than its actual cash on hand.
When calculating the adjusted bank balance during bank reconciliation, the total amount of outstanding checks are deducted from the bank statement’s ending balance. Since the outstanding checks were recorded when they were issued in this instance, the company’s general ledger accounts do not need to be changed. However, if the company determines to void an outstanding check, you must make a cash debit entry in the general ledger in order to increase the account balance.
The following is an example:
In the month of February, Company X recorded checks drawn from its general account totaling $250,000. Company X discovered it has a balance of $30,000 in unpaid checks during the January bank reconciliation process. Company X received a bank statement that revealed checks totaling $200,000 were written in February. The balance of checks due from Company X at the end of February would be:
| Outstanding checks (starting balance) | $30,000 |
| Add: Checks written | $250,000 |
| Total checks to be paid: | $280,000 |
| Less: Checks paid (per bank statement) | $200,000 |
| Outstanding checks (ending balance) | $80,000 |
Look Out for General Ledger (G/L) Adjustments
Your bank balance and book balance might not match up after taking outstanding checks into account. This indicates that the bank has changed your balance but has not yet updated your general ledger (G/L).
To finish the reconciliation procedure, you must include these fees in your G/L. When conducting a bank reconciliation, looking at the bank fees in your bank statement is the simplest approach to locate these adjustments. Additionally, look for any unaccounted-for deposits of other kinds. You must change the G/L balance to reflect these things once you’ve located them.
As an illustration, let’s imagine the bank charged your company $25 in service charges while also paying you $10 in interest. Your G/L balance will need to be increased by $15. After making these last modifications, you should reconcile the bank and book balances.
Frequently Asked Questions (FAQs)
How often should I reconcile my accounts?
All organizations should typically perform bank reconciliation once every month. Because banks send monthly statements at the end of each month that can serve as the foundation for reconciliation, it is convenient to carry out this task then. To accommodate various business demands, reconciliation can be performed whenever necessary using online month-to-date statements.
Is it important to reconcile all of my bank accounts?
Reconciling accounts with little activity is not necessary. Any recurring debits or deposits should be transferred to more active accounts after these accounts are closed.
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